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Estimating Sectoral Disinflation Cost in India: Some Structural VAR Evidence

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Abstract

This paper attempts a sectoral estimation of sacrifice ratios for India. Two Structural VAR models are estimated using quarterly data for the period 1997–98 Q1 to 2016–17 Q1. The empirical findings suggest that the real cost of disinflation policy is not negligible in India. The estimate of sacrifice ratios in terms of real GDP range from 0.16 to 0.17 depending upon the model employed. The calculation of sectoral sacrifice ratios show that all the three sectors are affected negatively and the largest impact is found in the manufacturing sector followed by the other two sectors, i.e., agriculture sector and service sector. The sacrifice ratio in the manufacturing sector is found to be 1.10 and 0.72 indicating huge negative impact of tight monetary policy. Similarly, for the agriculture sector the sacrifice ratios are 0.40 and the service sector shows sacrifice ratios of 0.36 and 0.37 respectively for different models. Further, from 10-year rolling estimation, we find that sacrifice ratios are time varying. The sacrifice ratio is declining in the last few quarters at the aggregate and sectoral levels indicating that disinflation could be less costly in recent times. However, the high disinflation cost experienced prior to the year 2015 can’t be neglected. So, it is important to take caution while interpreting the results of disinflation cost in India.

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Fig. 1

Source: Authors own work

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Source: Authors calculation from RBI

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Source: Authors’ own calculation

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Source: Authors’ own calculation

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Notes

  1. Cecchetti and Rich (2001) argue that the measurement of sacrifice ratio without decomposing the impact of different shocks would result in the biased estimation of sacrifice ratio.

  2. The theorem says that any covariance stationary process has a linear representation.

  3. Service GDP includes Real estate and business services, trade, hotel, transport and communications, insurance, finance.

  4. Blanchard and Quah (1989) assumed that monetary policy shock has no long-run impact on output growth.

  5. Annual Report (2014–15) of NABARD, India.

  6. Annual Report (2014-15) of NABARD, India.

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  1. School of Economics, University of Hyderabad, Hyderabad, 500046, India

    Dinabandhu Sethi & Debashis Acharya

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  1. Dinabandhu Sethi
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Sethi, D., Acharya, D. Estimating Sectoral Disinflation Cost in India: Some Structural VAR Evidence. J. Quant. Econ. 16 (Suppl 1), 23–46 (2018). https://doi.org/10.1007/s40953-017-0109-0

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