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Asymmetric Monetary Policy Transmission in India:Does Financial Friction Matter?

Ranjan Kumar Mohanty () and N R Bhanumurthy ()
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Ranjan Kumar Mohanty: Xavier Institute of Management, Bhubaneshwar(XIMB)

BASE University Working Papers from BASE University, Bengaluru, India

Abstract: In the context of adoption of flexible inflation targeting regime in India since 2016 and is about to be reviewed soon, it is necessary to understand the effectiveness of monetary transmission mechanism. The paper investigates if there are any asymmetries in the transmission during different regimes, and also verify the role of financial frictions in such asymmetries, if it exists. By using Markov-Switching Vector Autoregression (MS-VAR) models, our results suggest that there are asymmetries in the monetary transmission mechanism during highly volatile and low volatile regimes with respect to both output and inflation. It also finds that financial frictions do influence the extent of policy transmission process in India. From a policy perspective, while the Reserve Bank of India (RBI) may continue to target inflation especially during high volatile regimes, it could have output growth as an additional target especially during the low volatile regimes.

Keywords: Monetary Transmission Mechanism; Financial Frictions; Bank Credit Channel; Interest Rate Channel; Markov-Switching Vector Autoregression (MS-VAR); India (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 E58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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