Reserve Bank of India yesterday released a study titled, Risk Premium Shocks and Business Cycle Outcomes in India. This study investigates the dynamic effects of financial shocks on the business cycle. Against the backdrop of high non-performing assets (NPAs) of banks, a financial shock is conceived to be a shock to the interest rate spread stemming from a change in the default risk of borrowers. It is termed as the risk premium shock and occupies the central stage in this study. Business cycle implications of such a shock have been characterised and quantified in two steps.
At the outset, micro-level evidence on the effect of default risk on interest rate spread and credit growth is provided. Then, this micro-level evidence and predictions of dynamic stochastic general equilibrium (DSGE) models have been exploited to identify and estimate the impact of a risk premium shock using a sign-restricted VAR (SRVAR) model. The study notes that bank-level panel data analysis shows that an
The empirical findings of the study broadly confirm higher threshold inflation and higher growth in emerging market economies than in advanced economies. (Representative image)
MUMBAI: A Reserve Bank of India (RBI) study has advocated a mix of fiscal and monetary policies to mitigate economic downturn, saying demand side channel needs to be complemented with a conducive monetary transmission mechanism from the supply side.
Referring to the 2009 crisis, the study by Development Research Group (DRG) on Risk Premium Shocks and Business Cycle Outcomes in India , said that at the micro-level, the interest rate spread, attributed to risk premium on loans, increased in response to a rise in loan defaults during the post-2009 period.
A Reserve Bank of India (RBI) study has advocated a mix of fiscal and monetary policies to mitigate economic downturn, saying demand side channel needs to be complemented with a conducive monetary transmission mechanism from the supply side. Referring to the 2009 crisis, the study by Development Research Group (DRG) on Risk Premium Shocks and Business Cycle Outcomes in India , said that at the micro-level, the interest rate spread, attributed to risk premium on loans, increased in response to a rise in loan defaults during the post-2009 period. Also, the credit growth was found to be negatively associated with the loan default rate, indicating that a shock to the borrowing sectors has a significant negative impact on credit growth, it added.
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