A monetary business cycle model for India.

We build and calibrate a New Keynesian monetary business cycle model to the Indian economy to understand why the aggregate demand channel of monetary transmission is weak. Our main nding is that base money shocks have a larger and more persistent e⁄ect on output than an interest rate shock, as in the data. We show that nancial repression, in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. This is contrary to the consensus view in policy discussions on Indian monetary policy. We show that the presence of an informal sector hinders monetary transmission