A CGE Analysis of Money, Banking and Finance

This book explores the inter-linkages between the real and financial sectors of the Indian economy in a financial Computable General Equilibrium (CGE) framework. The parameters used in model are estimated through a calibration process using the data from a financial social accounting matrix. The parameter values generated in this way are used to obtain the alternative –counterfactual equilibrium associated with different types of policy regimes. The study assesses the impact of three monetary and credit policy changes, viz., the impact of reduction in the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and interest rates on deposits. It also analyses the impact of two fiscal policy changes, viz, reduction in indirect tax rates and public sector real investment expenditure. Beside these policy changes the study also assesses the impact of exogenous changes in the agriculture output. The findings of the study suggest that the policy makers should address both the demand side and the supply side of the economy. Concentration on only one side would result in undesirable impacts in certain sectors of the economy.