An Empirical Analysis of the Monetary Policy Reaction Function in India

Takeshi Inoue and Shigeyuki Hamori

No 200, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This paper empirically analyzes India’s monetary policy reaction function by applying the Taylor(1993) rule and its open-economy version which employs dynamic OLS. The analysis usesmonthly data from the period of April 1998 to December 2007. When the simple Taylor rule wasestimated for India, the output gap coefficient was statistically significant, and its sign conditionwas found to be consistent with theoretical rationale; however, the same was not true of theinflation coefficient. When the Taylor rule with exchange rate was estimated, the coefficients ofoutput gap and exchange rate had statistical significance with the expected signs, whereas theresults of inflation remained the same as before. Therefore, the inflation rate has not played a rolein the conduct of India’s monetary policy, and it is inappropriate for India to adopt aninflation-target type policy framework.

Keywords: DOLS; India; Monetary policy; Reaction function; Taylor rule (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2009-04-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 200. 2009-04-01

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