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An Empirical Analysis of the Monetary Policy Reaction Function in India

Author

Listed:
  • Inoue, Takeshi
  • Hamori, Shigeyuki

Abstract

This paper empirically analyzes India’s monetary policy reaction function by applying the Taylor(1993) rule and its open-economy version which employs dynamic OLS. The analysis usesmonthly data from the period of April 1998 to December 2007. When the simple Taylor rule wasestimated for India, the output gap coefficient was statistically significant, and its sign conditionwas found to be consistent with theoretical rationale; however, the same was not true of theinflation coefficient. When the Taylor rule with exchange rate was estimated, the coefficients ofoutput gap and exchange rate had statistical significance with the expected signs, whereas theresults of inflation remained the same as before. Therefore, the inflation rate has not played a rolein the conduct of India’s monetary policy, and it is inappropriate for India to adopt aninflation-target type policy framework.

Suggested Citation

  • Inoue, Takeshi & Hamori, Shigeyuki, 2009. "An Empirical Analysis of the Monetary Policy Reaction Function in India," IDE Discussion Papers 200, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    • Handle: RePEc:jet:dpaper:dpaper200
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    Citations

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    Cited by:

    1. Lavaneesvari Manogaran* & Siok Kun Sek, 2018. "Examining the Threshold Effect of Exchange Rate Changes on Monetary Policy Reaction Function of ASEAN-5: A Panel Threshold Approach," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 243-248:2.
    2. Eichengreen, Barry & Gupta, Poonam & Choudhary, Rishabh, 2021. "Inflation Targeting in India: An Interim Assessment," India Policy Forum, National Council of Applied Economic Research, vol. 17(1), pages 77-141.
    3. Kapur, Muneesh & Behera, Harendra, 2012. "Monetary Transmission Mechanism in India: A Quarterly Model," MPRA Paper 70631, University Library of Munich, Germany.
    4. Muneesh Kapur & Michael Debabrata Patra, 2010. "A Monetary Policy Model Without Money for India," IMF Working Papers 2010/183, International Monetary Fund.
    5. Muneesh Kapur & Michael Debabrata Patra, 2012. "Alternative Monetary Policy Rules for India," IMF Working Papers 2012/118, International Monetary Fund.

    More about this item

    Keywords

    DOLS; India; Monetary policy; Reaction function; Taylor rule;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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