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Natural Interest Rate: Assessing the Stance of India’s Monetary Policy under Uncertainty

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  • Harendra Behera
  • Sitikantha Pattanaik
  • Rajesh Kavediya

Abstract

Using a theoretical framework that combines the essence of Ramsay’s growth model and the New-Keynesian macrodynamics, and applying the Kalman filter estimation technique, this paper finds that India’s natural real interest rate in Q4 of 2014-15 lied in a range of 0.6 per cent to 3.1 per cent, even though core estimates point to a narrower range of 1.6 per cent to 1.8 per cent. These estimates indicate that the real interest rate gap was negative in India for a major part of the last about ten years when CPI inflation was persistently high, implying that monetary policy stance of the Reserve Bank was largely accommodative rather than anti-inflationary.

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  • Harendra Behera & Sitikantha Pattanaik & Rajesh Kavediya, 2015. "Natural Interest Rate: Assessing the Stance of India’s Monetary Policy under Uncertainty," Working Papers id:7654, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:7654
    Note: Institutional Papers
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    Cited by:

    1. Patra, Michael Debabrata & Khundrakpam, Jeevan Kumar & Gangadaran, Sivaramakrishnan, 2017. "The quest for optimal monetary policy rules in India," Journal of Policy Modeling, Elsevier, vol. 39(2), pages 349-370.
    2. Barendra Kumar Bhoi & Abhishek Kumar & Prashant Mehul Parab, "undated". "Aggregate demand management, policy errors and optimal monetary policy in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-029, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Goyal, Ashima & Arora, Sanchit, 2016. "Estimating the Indian natural interest rate: A semi-structural approach," Economic Modelling, Elsevier, vol. 58(C), pages 141-153.
    4. Kapur, Muneesh, 2018. "Macroeconomic Policies and Transmission Dynamics in India," MPRA Paper 88566, University Library of Munich, Germany.
    5. Hongjin Li & Naifang Su, 2020. "Financial Factors, Openness and the Natural Interest Rate in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(4), pages 76-100, July.

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