Applications of Business Cycle Accounting Models in Indian Economy

Abstract

In this thesis, we use the Business Cycle Accounting class of models to study the Indian economy. In the first paper, we estimate the Monetary Business Cycle Accounting model (MBCA henceforth) for the Indian Economy, and we find that the distortions in efficiency and investment wedges capture most of the fluctuations in output, investment and hours worked; nominal wedges account for around 40% of inflation, and half of the interest rate is accounted by the asset market wedge. In the second paper, I then study the non-linear effects of wedges. Because of data and computational constraints, I estimate non-linearity for one wedge at a time (giving us 7 total cases). I find that our results provide a new perspective over first-order estimation, for e.g. efficiency wedge increases in importance to account for output in all cases, not just in cases where I consider the efficiency wedge to have non-linear effects, hence underlining the interactions between the wedges. In the third paper, I analyze monetary policy transmission dynamics using a modified MBCA model. I define transmission as the credit spread. The paper has two setups: i) with the theoretical perfect monetary transmission, and ii) with the imperfect monetary transmission. The latter case includes a Statutory Liquidity Ratio (SLR) constraint. I find that: 1) The monetary wedges which include the asset market and Taylor wedges are important for understanding the lack of transmission of monetary policy in the Indian economy. This is interesting because real wedges have little to no role to play here. 2) I also find that SLR is having a distortionary impact on transmission. As per our knowledge, this is the first paper to show this in the Indian economy context. newline