A monetary policy model for India
Michael Debabrata Patra and
Macroeconomics and Finance in Emerging Market Economies, 2012, vol. 5, issue 1, 18-41
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.
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