Madras Institute of Development faculty speaks on ‘Financial Frictions and Monetary Policy Transmission in India’ at IIMB’s research seminar

                                                                   Prof. Shesadri Banerjee

27 August, 2018, Bengaluru: The Office of Research and Publications (R&P) at IIM Bangalore hosted a research seminar titled, ‘Financial Frictions and Monetary Policy Transmission in India’, on August 24 (Friday), 2018, on campus. The talk was delivered by Professor Shesadri Banerjee, from the Madras Institute of Development Studies (MIDS).

Using empirical evidence from literature (Kletzer, 2012; Mishra et al. 2016) as the reference point, Prof. Banerjee examined whether the frictions of a bank-led credit market can explain low pass-through of the monetary transmission mechanism. He also addressed the research question using a New Keynesian business cycle model (Gerali et al., 2010, Anand et al., 2014) with Indian economy specific features of liquidity-constrained segment of the population, competitive labor market and statutory requirements of the bank. He incorporated a variety of real and nominal shocks to the prototype economy to replicate the business cycle properties and quantify the variance decomposition of shocks. Combining the methods of calibration and estimation, he configured the baseline parameterization and validated with second-order moments of the data. He further explained how the model distinguishes the co-movement of interest rates, incomplete pass-through and adjustment mechanism of the real, nominal and financial variables for a positive interest rate shock. He also identified the critical role of liquidity-constrained and collateral-constrained households, and interest rate rigidity in the transmission process.

Inviting questions from the audience, Prof. Banerjee, touched upon topics like credit constraint borrowers, rigidity of interest rates, monetary and other finance related fiscal authorities.

Dr. Shesadri Banerjee, Assistant Professor at MIDS, Chennai, is an applied macroeconomist. His research includes various issues related to inflation dynamics, business cycles, and fiscal and monetary policies in advanced and developing countries.

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