Money and Business Cycle: Evidence From India

Ashima Goyal and Abhishek Kumar

Working Papers from eSocialSciences

Abstract: This paper takes a New Keynesian model with non-separable money in utility to Indian data using maximum likelihood. The identification problem in isolating the effect of money on output and inflation is solved by adjusting real balances for shifts in money demand. Estimates with an extended model with relevant features like partial indexation in prices, markup shock and time varying inflation target, show that real balances do affect output and inflation even after correcting for money demand unlike results for the United States and Eurozone. A regression estimate and multivariate structural vector autoregression give similar results. Types of money matter. Reserve money has the largest impact, pointing to the importance of the informal sector. The estimated income elasticity of narrow money is more than twice that of broad money, pointing to the dependence of firms on banks. Interest semi elasticity of money demand is close to one. Responsiveness of output to real interest rate is high. We find that interest rate setting is quite persistent. Coefficient of lagged interest rate varies from 0.71 to 0.95. The paper concludes that there is a significant asymmetry in the role of money in India (an emerging economy) in comparison to United States and Eurozone (advanced economies).

Keywords: eSS, DSGE; India; IS; LM; Money Demand; Maximum Likelihood; Inflation; Monetary Policy; Supply Shock, non-separable money, likelihood, money demand, indexation in prices, inflation target, multivariate structural vector autoregression, inflromal sector, firms, banks, money demand, interest rate. (search for similar items in EconPapers)
Date: 2018-09
Note: Institutional Papers
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.esocialsciences.org/Download/repecDownl ... AId=12925&fref=repec

Related works:
Journal Article: Money and business cycle: Evidence from India (2018)
Working Paper: Money and business cycle: Evidence from India (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ess:wpaper:id:12925

Access Statistics for this paper

More papers in Working Papers from eSocialSciences
Bibliographic data for series maintained by Padma Prakash ().