EFFECTS OF MONETARY SHOCKS ON EXCHANGE RATE: EMPIRICAL EVIDENCE FROM INDIA

Chandan Sharma and Rajat Setia
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Rajat Setia: National Institute of Financial Management, India

Studies in Business and Economics, 2017, vol. 12, issue 2, 206-219

Abstract: This paper examines the effect of monetary policy shocks on exchange rate in a Multiple Indicator Approach (MIA) framework. This study has employed a monetary policy index of key monetary policy instruments in India (Bank rate, Cash Reserve Ratio, Repo and Reverse Repo rates). The study finds the empirical evidence for puzzling behavior of price level and exchange rate. Both price and exchange rate increase initially in response to a contractionary policy shock. Policy shocks affect output, inflation and exchange rate to an appreciable extent over a forecasting horizon of one year.

Keywords: Monetary Policy Transmission; Exchange rate; Impulse Response (search for similar items in EconPapers)
Date: 2017
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