 Regime Shifts in India’s Monetary Policy Response FunctionLokendra Kumawat and N R Bhanumurthy Working Papers from eSocialSciences Abstract: The objectives of monetary policy have always been a topic of intensive debate. This debate has resurfaced during the past few years. In India too monetary policy-making appears to have undergone significant change during the last two decades and has also been responding to changing macroeconomic environment. Against this backdrop an attempt has been made in this paper to model the monetary policy response function for India, for the period April 1996 to July 2015. Using 91-day Treasury bill rate as the policy rate, we find that the monetary policy has been responsive to inflation rate, output gap and exchange rate changes during this period. We find substantial time-varying behavior in the reaction function. The regime shift tests show that the transition is driven by inflation gap as well as exchange rate changes. Highly complex nature of dynamics of interest rate does not allow us to estimate many models, but the models estimated show that the monetary policy responds to inflation gap as well as exchange rate changes. Another important finding is that there is a high degree of inertia in the policy rates. [Working paper No. 177]. Keywords: Monetary policy; reaction function; smooth transition regression; India; exchange rate; policy rates; inflation gap; macroeconomic; volatility; target variables; policy; coefficients (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ess:wpaper:id:11400 Access Statistics for this paper More papers in Working Papers from eSocialSciences |
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