Working of Expectations Channel of Monetary Policy Transmission in India

Ashima Goyal and Prashant Parab
Additional contact information
Prashant Parab: Indira Gandhi Institute of Development Research, Gen. A. K. Vaidya Marg, Santosh Nagar, Goregaon (E), Mumbai 400065, India

Journal of International Commerce, Economics and Policy (JICEP), 2023, vol. 14, issue 02, 1-38

Abstract: In this paper, we examine the working of the expectations channel of monetary policy transmission for India, first by investigating the role of inflation expectations in an aggregate supply-demand (AS-AD) adapted to the Indian economy. Second, formulating an inflation function determining convergence of core inflation to its expected value in a fixed point arising through interactions between central bank (CB) expected inflation and expectations of different agents. Finally, we estimate SVARs with variables derived from the above exercises. We first estimate how expectations shocks affect macroeconomic aggregates. Second, we identify the shocks affecting expectations of households and professional forecasters (PFs). In addition, we estimate shocks influencing core inflation. Results suggest the expectation channel worked through interactions between PF forecasts and CB projections, with causality from CB projections to core and from core to household expectations. Supply shocks had short-run effects but core inflation dominated in the longer run. Expectations converged. The expectations channel of transmission to inflation was more effective through communication than through the policy rate, since the rate had low and sometimes even perverse effects. The relatively low impact of demand variables on inflation supports the hypothesized AS-AD structure.

Keywords: Expectations channel; Central Bank communications; household expectations; survey of professional forecasters; structural vector auto regression (search for similar items in EconPapers)
JEL-codes: D83 D84 E52 E58 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S1793993323500126
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:jicepx:v:14:y:2023:i:02:n:s1793993323500126

Ordering information: This journal article can be ordered from

DOI: 10.1142/S1793993323500126

Access Statistics for this article

Journal of International Commerce, Economics and Policy (JICEP) is currently edited by Ramkishen S. Rajan

More articles in Journal of International Commerce, Economics and Policy (JICEP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().