IS MONETARY POLICY SYMMETRICAL IN ITS EFFECT ON SECTORAL OUTPUT?
IS MONETARY POLICY SYMMETRICAL IN ITS EFFECT ON SECTORAL OUTPUT?

Summary/Abstract: Monetary policy to be effective, besides an accurate assessment of the economy and precise timing, a clear understanding of monetary transmission mechanism as well as of the channels through which monetary policy affects output and prices is important. Further, what has duly received considerable attention in recent days is the disaggregated effect of monetary policy on output at sectoral level, i.e., whether different sectors respond symmetrically to monetary policy shocks. Extending this line of enquiry, the paper analyzes the effect of monetary policy shocks on the aggregate as well as on the sectoral output of Indian economy using reduced form vector auto regression (VAR) model. In order to understand the direction of response variables (aggregate and disaggregated output) to standard shocks (monetary policy), we employ impulse response functions. We find that the impact of a monetary policy shock at the sectoral level is heterogeneous. Sectors such as mining and quarrying, manufacturing, construction and trade, hotel, transport and communications seem to decline more sharply than aggregate output in response to a monetary tightening. We also augment the basic VAR by including three channels-credit channel, exchange rate channel and asset price channel of the monetary policy, and analyze the sector specific importance of each of the channel. The channels through which monetary policy is transmitted to the real economy are found to be different for every sector. In most of the cases, multiple channels are responsible for the changes in the aggregate and sectoral output to the monetary policy shock. These results clearly indicate the need for a sector specific monetary policy in India.

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