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Terms of trade shocks and monetary policy in India
journal contribution
posted on 2018-01-01, 00:00 authored by C Ghate, S Gupta, Debdulal MallickDebdulal MallickCentral banks in emerging market economies often grapple with understanding the monetary policy response to an inter-sectoral terms of trade shock. To address this, we develop a three sector closed economy NK-DSGE model calibrated to India. Our framework can be generalized to other emerging markets and developing economies. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a grain and vegetable sector. The government procures grain from the grain market and stores it. We show that the procurement of grain leads to higher inflation, a change in the sectoral terms of trade, and a positive output gap because of a change in the sectoral allocation of labor. We compare the transmission of a single period positive procurement shock with a single period negative productivity shock and discuss the implications of such shocks for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies.
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Journal
Computational economicsVolume
51Issue
1Pagination
75 - 121Publisher
SpringerLocation
Berlin, GermanyPublisher DOI
ISSN
0927-7099eISSN
1572-9974Language
engPublication classification
C1 Refereed article in a scholarly journalCopyright notice
2016, SpringerUsage metrics
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