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Estimating Impacts of Monetary Policy on Aggregate Demand in India

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  • Khundrakpam, Jeevan Kumar

Abstract

Using a structural VAR model on quarterly data from 2000Q1 to 2011Q1, this paper estimated the impact of monetary policy on aggregate demand in India. The overall impact on aggregate demand is then decomposed to observe the differential impact among the various components. It finds that an interest rate hike has a significant negative impact on the growth of aggregate demand. However, the maximum impact is borne by investment demand growth and imports growth. Impact on private consumption growth and exports growth are relatively far more subdued, while there is hardly any cumulative impact on government consumption growth as it increases after some marginal fall initially. Variance decomposition analysis indicates that interest rate accounts for a significant percentage of the fluctuation in the growth of all the components of aggregate demand, except government consumption. Further, interest rate channel completely dominates exchange rate channel in monetary transmission, though the latter channel has non-negligible impact on investment and imports.

Suggested Citation

  • Khundrakpam, Jeevan Kumar, 2012. "Estimating Impacts of Monetary Policy on Aggregate Demand in India," MPRA Paper 50902, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:50902
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    References listed on IDEAS

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    Cited by:

    1. Lan Nguyen, Thi Mai & Papyrakis, Elissaios & van Bergeijk, Peter A.G., 2021. "Publication bias in the price effects of monetary policy: A meta-regression analysis for emerging and developing economies," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 567-583.
    2. Stepan Oana Maria & Lungu Mircea-Alexandru, 2015. "The financing of economic growth in Romania by the atraction and usage of structural founds," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 1(43), pages 289-298.
    3. Thi Mai Lan Nguyen, 2020. "Output Effects of Monetary Policy in Emerging and Developing Countries: Evidence from a Meta-Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(1), pages 68-85, January.

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    More about this item

    Keywords

    Monetary transmission; SVAR; impulse responses; aggregate demand components;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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