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Regime Shifts in India's Monetary Policy Response Function

Author

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  • Kumawat, Lokendra

    (Ramjas College, Delhi University)

  • Bhanumurthy, N. R.

    (National Institute of Public Finance and Policy)

Abstract

The objectives of monetary policy have always been a topic of intensive debate. This debate has resurfaced during the past few years. In India too monetary policy-making appears to have undergone significant change during the last two decades and has also been responding to changing macroeconomic environment. Against this backdrop an attempt has been made in this paper to model the monetary policy response function for India, for the period April 1996 to July 2015. Using 91-day Treasury bill rate as the policy rate, we find that the monetary policy has been responsive to inflation rate, output gap and exchange rate changes during this period. We find substantial time-varying behavior in the reaction function. The regime shift tests show that the transition is driven by inflation gap as well as exchange rate changes. Highly complex nature of dynamics of interest rate does not allow us to estimate many models, but the models estimated show that the monetary policy responds to inflation gap as well as exchange rate changes. Another important finding is that there is a high degree of inertia in the policy rates.

Suggested Citation

  • Kumawat, Lokendra & Bhanumurthy, N. R., 2016. "Regime Shifts in India's Monetary Policy Response Function," Working Papers 16/177, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:16/177
    Note: Working Paper 177, 2016
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    References listed on IDEAS

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    3. Sengupta, Bodhisatva, 2016. "Endogenous Leadership in a Federal Transfer Game," Working Papers 16/180, National Institute of Public Finance and Policy.

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    More about this item

    Keywords

    Monetary policy ; reaction function ; smooth transition regression ; India.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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