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

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  • Ranjan Kumar Mohanty

    (Xavier Institute of Management, Bhubaneshwar(XIMB))

  • N R Bhanumurthy

    (BASE University)

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.

Suggested Citation

  • Ranjan Kumar Mohanty & N R Bhanumurthy, 2020. "Asymmetric Monetary Policy Transmission in India:Does Financial Friction Matter?," BASE University Working Papers 03/2020, BASE University, Bengaluru, India.
    • Handle: RePEc:alj:wpaper:03/2020
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Transmission Mechanism; Financial Frictions; Bank Credit Channel; Interest Rate Channel; Markov-Switching Vector Autoregression (MS-VAR); India;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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