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US monetary policy and the financial channel of the exchange rate: evidence from India

Shesadri Banerjee and M S Mohanty

No 945, BIS Working Papers from Bank for International Settlements

Abstract: The effect of US monetary policy on EMEs is one of the fiercely debated issues in international finance. We contribute to this debate using micro- and macro-level analyses from India over the period 2004-2019. Using a dynamic panel estimation model of non-financial firms, we show that US monetary tightening adversely affects firms’ net worth and reduces domestic credit relative to external credit. Using a sign-identified VAR model, we find that the contractionary US monetary policy leads to a significant downturn in the domestic credit and business cycles. The responses of firms and the impact on the domestic credit cycle suggest that the financial channel of the exchange rate is one of the conduits transmitting US monetary policy to India.

Keywords: US monetary policy; international transmission of monetary policy; dynamic panel estimation; sign-restricted VAR model; financial channel; Indian economy (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 F42 F61 F62 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2021-05
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac, nep-mon and nep-opm
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