Unpacking the Black Box: Heterogeneous Impact of Monetary Policy Shocks on Sectoral Output in India

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  • Economic and Political Weekly Vol.61; No.12 - 21 March 2026 pp.53-63
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Summary: The time-varying response of aggregate and sectoral output to monetary policy shocks is examined using a time-varying parameter vector autoregression model. The findings indicate that while most sectors respond to monetary policy through multiple monetary transmission channels, the magnitude and direction of impulse responses vary across time and economic conditions. Construction and manufacturing emerge as the most interest-sensitive sectors. The exchange rate and asset price channels exert relatively stronger sectoral efforts during periods of normal economic outlook. Given the redistributive implications of monetary policy, the effectiveness of the inflation targeting regime may require complementary income-supportive fiscal coordination.
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The time-varying response of aggregate and sectoral output to monetary policy shocks is examined using a time-varying parameter vector autoregression model. The findings indicate that while most sectors respond to monetary policy through multiple monetary transmission channels, the magnitude and direction of impulse responses vary across time and economic conditions. Construction and manufacturing emerge as the most interest-sensitive sectors. The exchange rate and asset price channels exert relatively stronger sectoral efforts during periods of normal economic outlook. Given the redistributive implications of monetary policy, the effectiveness of the inflation targeting regime may require complementary income-supportive fiscal coordination.

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