NONLINEAR MONETARY POLICY REACTION FUNCTION AND MACROECONOMIC FUNDAMENTALS IN INDIA

Masudul Hasan Adil (), Vishal Sharma () and Sana Fatima ()
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Masudul Hasan Adil: Indian Institute of Technology Mandi, India
Vishal Sharma: ICFAI Business School, Bengaluru, Karnataka, India
Sana Fatima: Symbiosis School for Online and Digital Learning, Symbiosis International (Deemed University), Pune, India

Bulletin of Monetary Economics and Banking, 2025, vol. 28, issue 1, 15-34

Abstract: The hybrid Talor rule of the Reserve Bank of India (RBI) is the subject of the current study, which investigates nonlinearities in an open economy that includes a fiscal variable. The analysis employs a nonlinear cointegration approach and identifies policy preference asymmetries. The RBI prioritizes price stability due to the preference for inflation avoidance over recession. Fiscal variable plays a significant role in estimating the Taylor rule, which suggests that it is necessary to align fiscal and monetary policy in order to maintain the inflation within the designated range. Lastly, the nonlinear Talor rule findings not only aid in comprehending the central bank’s policy setting behavior but also prevent the drawing of inaccurate and misleading inferences.

Keywords: Taylor rule; Flexible inflation targeting; Nonlinear unit root and cointegration; Asymmetries; India (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 E62 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:28:y:2025:i:1b:p:15-34

DOI: 10.59091/2460-9196.2516

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