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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 Mallick
Central 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.

History

Journal

Computational economics

Volume

51

Issue

1

Pagination

75 - 121

Publisher

Springer

Location

Berlin, Germany

ISSN

0927-7099

eISSN

1572-9974

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2016, Springer