Money and business cycle: Evidence from India

Ashima Goyal and Abhishek Kumar

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: In this paper we take 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. We conclude 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: India; IS; LM; Money Demand; Maximum Likelihood; Inflation; Monetary Policy; Supply Shock (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2018-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Money and business cycle: Evidence from India (2018)
Working Paper: Money and Business Cycle: Evidence From India (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2018-020

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