Uncertainty and Effectiveness of Monetary Policy: A Bayesian Markov Switching-VAR Analysis

Zulquar Nain and Bandi Kamaiah
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Zulquar Nain: Department of Economics, Aligarh Muslim University, Aligarh, India
Bandi Kamaiah: School of Economics, University of Hyderabad, India

Journal of Central Banking Theory and Practice, 2020, vol. 9, issue special issue, 237-265

Abstract: There is a growing body of literature examining the effectiveness of the monetary policy on the macroeconomy in different contexts for developed and developing countries. However, lately, especially after the GFC, the focus of research shifted to examine the role of uncertainty in economic activity and on the monetary policy effectiveness. Both theoretical and empirical studies suggest that uncertainty does influence monetary policy effectiveness. However, until now, empirical studies are restricted to only developed countries. To this end, the present study examines the influence of uncertainty on monetary policy effectiveness for a developing country, namely India. We applied a non-linear VAR, which allows us to examine the effect of monetary policy shocks during high and low uncertainty periods. The results exhibit that uncertainty influences the effectiveness of monetary policy shocks. We find weaker effects of the monetary policy shocks during high uncertainty regime relative to low uncertainty regime.

Keywords: Uncertainty; Monetary Policy; India (search for similar items in EconPapers)
JEL-codes: E31 E32 E40 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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