A flow of funds model for India and its implications

The paper models household and commercial bank asset-choice for the Indian economy and integrates it with a simple two-sector formulation for the real sector. The dynamics of adjustment of household and commercial bank asset-choices is modeled using a “general disequilibrium” framework of the Brainard-Tobin type. The model is used to simulate policies that constitute India's ongoing stabilization and structural adjustment program. It is found that contractionary monetary policy has weak effects on output and prices, but deflationary fiscal policy has strong negative effects. Financial sector reform, on the other hand, has positive effects on investment and output.