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Perverse liquidity effect of monetary policy: some evidence for India

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  • Ganti Subrahmanyam
  • Sridhar Telidevara
  • Debashis Acharya

Abstract

The liquidity effect of money supply increases, as policy-oriented measures, would generally lead to a decline in interest rates. This is the direct effect. However, such money supply increases lead to a sum of the direct effect plus the positive indirect price and income effects. In sum, the net effect may be positive leading to a net increase and not a decrease in the interest rate. The regular money demand function is suitably modified to capture the structural changes of the Indian economy to verify the net effect of monetary policy-induced money supply movements. The empirical evidence indicates the presence of a perverse liquidity effect.

Suggested Citation

  • Ganti Subrahmanyam & Sridhar Telidevara & Debashis Acharya, 2014. "Perverse liquidity effect of monetary policy: some evidence for India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 7(1), pages 61-82, March.
    • Handle: RePEc:taf:macfem:v:7:y:2014:i:1:p:61-82
    DOI: 10.1080/17520843.2013.773934
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