Financial frictions, bank intermediation and monetary policy transmission in India

Do the different types of financial friction have differential implications for monetary transmission in emerging economies? We investigate this question using India as the country for analysis. We adopt a New Keynesian business cycle model with bank intermediation, extend it by the Indian economy‐s...

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Bibliographic Details
Published inEconomics of transition and institutional change Vol. 31; no. 3; pp. 749 - 785
Main Authors Banerjee, Shesadri, Behera, Harendra
Format Journal Article
LanguageEnglish
Published 01.07.2023
Subjects
financial frictions
Indian economy
monetary policy
transmission mechanism
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Summary:Do the different types of financial friction have differential implications for monetary transmission in emerging economies? We investigate this question using India as the country for analysis. We adopt a New Keynesian business cycle model with bank intermediation, extend it by the Indian economy‐specific features and validate with the data. The baseline model explains the co‐movements of interest rates, incomplete pass‐through and sluggish adjustment mechanism of the macro‐financial variables for a policy interest rate shock. It identifies the collateral‐constrained, financially excluded households and low proportion of savers as the primary sources of frictions causing weak monetary transmission.
ISSN:2577-6975
2577-6983
DOI:10.1111/ecot.12355