A monetary policy model for India

Michael Debabrata Patra and Muneesh Kapur

Macroeconomics and Finance in Emerging Market Economies, 2012, vol. 5, issue 1, 18-41

Abstract: A New Keynesian model estimated for India yields valuable insights. Aggregate demand reacts to interest rate changes with a lag of three quarters, while inflation takes four quarters to respond to demand conditions. Inflation thus responds to monetary policy actions with a lag of seven quarters. Inflation is inertial and persistent when it sets in, irrespective of the source. Exchange rate pass-through to domestic inflation is low. Inflation turns out to be the dominant focus of monetary policy, accompanied by a strong commitment to the stabilization of output.

Date: 2012
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DOI: 10.1080/17520843.2011.576453

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