Estimating Impacts of Monetary Policy on Aggregate Demand in India

Jeevan Khundrakpam

MPRA Paper from University Library of Munich, Germany

Abstract: Using a structural VAR model on quarterly data from 2000Q1 to 2011Q1, this paper estimated the impact of monetary policy on aggregate demand in India. The overall impact on aggregate demand is then decomposed to observe the differential impact among the various components. It finds that an interest rate hike has a significant negative impact on the growth of aggregate demand. However, the maximum impact is borne by investment demand growth and imports growth. Impact on private consumption growth and exports growth are relatively far more subdued, while there is hardly any cumulative impact on government consumption growth as it increases after some marginal fall initially. Variance decomposition analysis indicates that interest rate accounts for a significant percentage of the fluctuation in the growth of all the components of aggregate demand, except government consumption. Further, interest rate channel completely dominates exchange rate channel in monetary transmission, though the latter channel has non-negligible impact on investment and imports.

Keywords: Monetary transmission; SVAR; impulse responses; aggregate demand components (search for similar items in EconPapers)
JEL-codes: E20 E27 E52 (search for similar items in EconPapers)
Date: 2012-12
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Citations: View citations in EconPapers (3)

Published in RBI WORKING PAPER SERIES 18.2012(2012): pp. 1-20

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50902

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