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Measuring monetary policy and its impact on the bond market of an emerging economy

Rudra Sensarma and Indranil Bhattacharyya

Macroeconomics and Finance in Emerging Market Economies, 2016, vol. 9, issue 2, 109-130

Abstract: In view of multiple instruments used by many central banks in emerging market economies (EMEs), we derive a composite measure of monetary policy for India and assess its impact on the yield curve. Our results show that while monetary policy has the dominant impact among macroeconomic variables on the entire term structure, it is particularly strong at the shorter end and on credit spreads. Shifts in the level of the government yield curve and credit spreads also lead to changes in monetary policy. In terms of robustness, our measure performs better than a narrative-based measure of monetary policy available in the literature.

Date: 2016
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DOI: 10.1080/17520843.2015.1123743

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