Macroeconomic impact of the supply shock during COVID-19 pandemic in India

Abstract

PurposeThe study focuses on examining the impact of the supply shock on the Indian macroeconomic variables during the COVID-19 period.Design/methodology/approachTime-varying factor augmented vector autoregressive model has been employed to study the asymmetry in transmission of supply shock on Indian economy during pre- and post-COVID-19 times.FindingsThe authors find that with supply shock, retail food inflation outpaced in COVID-19 times. Production levels reported by IIP fell to abysmally low levels in the post-COVID-19 times when the economy stalled. The liquidity stimulus provided by the central bank led to the negative response of policy rates to the supply shocks during the COVID-19 times.Originality/valueThe study stands novel in examining the impact of COVID-19 pandemic on Indian economy through the lenses of asymmetric transmission of supply shock during pre- and post-COVID-19 times.