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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 t ....
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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