Terms of Trade Shocks and Monetary Policy in India

Ghate, Chetan and Gupta, Sargam and Mallick, Debdulal (2016): Terms of Trade Shocks and Monetary Policy in India.

Abstract

Central banks in emerging markets 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 countries. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a food 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 what implications such shocks have for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Multi-sector New Keynesian DSGE Models, Terms of Trade Shocks, Reserve Bank of India, Indian Economy, Agricultural Procurement
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q18 - Agricultural Policy ; Food Policy

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