Macroeconomic effect of NBFC default shock in India: a four-sector DSGE model

Abstract

ABSTRACT In this study a four-sector dynamic stochastic general equilibrium model is developed by introducing banks and non-banking financial companies (NBFCs) in a general two-sector real business cycle model in context of Indian economy. Examining the impact of three shocks namely NBFC default shock, productivity shock and investment shock, default of NBFC on its loan does not have any significant impact on aggregate output, consumption and investment. The shock has localized impact on the NBFC sector itself because of its low asset size and weak interconnectedness with the Indian economy. Productivity and investment shock have significant impact on the macroeconomic variables.