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Does financial interconnectedness affect monetary transmission? Evidence from India

Saibal Ghosh

Macroeconomics and Finance in Emerging Market Economies, 2022, vol. 15, issue 3, 273-300

Abstract: We explore the credit and interest rate channel of monetary policy transmission in India in the presence of financial interconnectedness. Accordingly, we construct several high-level measures of such interconnectedness relating to credit exposure and funding dependence, between banks and shadow banks. The findings suggest that interconnectedness impacts lending and has a much more significant impact on lending rates. In addition, there is a differential impact across bank ownership and relatedly, the impact differs during periods of monetary expansion versus contraction. In addition, we find that asset risk and funding cost are the two important channels through which interconnectedness affects transmission.

Date: 2022
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DOI: 10.1080/17520843.2020.1859574

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