Showing papers by "Chetan Ghate published in 2018"

Terms of Trade Shocks and Monetary Policy in India

Abstract: 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.

Fiscal Austerity in Emerging Market Economies

Abstract: We build a small open economy RBC model with financial frictions to analyze the incidence of expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, a proto-typical EME. We show that a spending based fiscal consolidation has an expansionary effect on output. In contrast, tax based consolidations are always contractionary. Either measure of consolidation, however, tends to increase the fiscal deficit and therefore the sovereign risk premia in our framework. Our findings support the results in the IMF WEO (2010), that tax based consolidation measures are more costly (in terms of GDP losses) than spending based consolidations in the short run. We identify new mechanisms that underlie the dynamics of fiscal reforms and their implications for successful fiscal consolidations.

A Monetary Business Cycle Model for India

Abstract: We build and calibrate a New Keynesian monetary business cycle model to the Indian economy to understand why the aggregate demand channel of monetary transmission is weak. Our main finding is that base money shocks have a larger and more persistent e§ect on output than an interest rate shock, as in the data. We show that financial repression, in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. This is contrary to the consensus view in policy discussions on Indian monetary policy. We show that the presence of an informal sector hinders monetary transmission