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Alternative Monetary Policy Rules for India

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  • Muneesh Kapur
  • Michael Debabrata Patra
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    Abstract

    This paper empirically evaluates the operational performance of the McCallum rule, the Taylor rule and hybrid rules in India over the period 1996-2011 using quarterly data, with a view to analytically informing the conduct of monetary policy. The results show that forward-looking formulations of both rules and their hybrid version - setting a nominal output growth objective for monetary policy with an interest rate instrument - outperform contemporaneous and backward-looking specifications, especially when targeting core components of GDP and inflation, and combine the best parts of efficiency and discretion.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/118.

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    Length: 44
    Date of creation: 01 May 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/118

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    Related research

    Keywords: Monetary authorities; Monetary operations; monetary policy; inflation; monetary base; monetary policy rules; central bank; money supply; money growth; monetary response; monetary authority; reserve requirements; price stability; aggregate demand; monetary economics; real output; monetary policy rule; monetary policy framework; price inflation; real interest rate; monetary targeting; inflation rate; monetary aggregate; inflation targeting; monetary policy reaction function; high inflation; coefficient on inflation; money market; real rate of interest; money stock; monetary fund; rate of inflation; liquidity ratio; monetary aggregates; macroeconomic performance; rational expectations; monetary conditions; gdp deflator; monetary policy regime; monetary policy regimes; value of money; money demand; macroeconomic stability; inflation dynamics; inflation data; price level; monetary policy reaction functions; monetary target; monetary policy instrument; monetary growth; financial stability; average inflation; inflation objective; stock of money; monetary transmission; monetary stability; real variables; inflationary pressures; monetary transmission mechanism; inflation targeting regime; discretionary monetary policy; open market operations; economic instability; inflationary consequences; monetary management; real interest rates; intermediate monetary target; persistent high inflation;

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    References

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    1. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
    2. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1113-44, December.
    3. Joseph H. Haslag, 1993. "Does it matter how monetary policy is implemented?," Research Paper, Federal Reserve Bank of Dallas 9310, Federal Reserve Bank of Dallas.
    4. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    5. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
    6. Raghbendra Jha, 2008. "Inflation targeting in India: issues and prospects," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 22(2), pages 259-270.
    7. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Working Paper, Federal Reserve Bank of Richmond 00-03, Federal Reserve Bank of Richmond.
    8. W. A. Razzak, 2003. "Is the Taylor Rule Really Different from the McCallum Rule?," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 21(4), pages 445-457, October.
    9. Esanov, Akram & Merkl, Christian & Vinhas de Souza, Lúcio, 2004. "Monetary Policy Rules for Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 11/2004, Bank of Finland, Institute for Economies in Transition.
    10. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(2), pages 207-228, April.
    11. Meade, James E, 1978. "The Meaning of "Internal Balance"," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(351), pages 423-35, September.
    12. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
    13. Hutchison, Michael & Sengupta, Rajeswari & Singh, Nirvikar, 2010. "Estimating a Monetary Policy Rule for India," MPRA Paper 21106, University Library of Munich, Germany.
    14. Sitikantha Pattanaik & G.V. Nadhanael, 2013. "Why persistent high inflation impedes growth? An empirical assessment of threshold level of inflation for India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 6(2), pages 204-220, September.
    15. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers, Stockholm - International Economic Studies 644, Stockholm - International Economic Studies.
    16. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 15/2008, Bank of Finland, Institute for Economies in Transition.
    17. John B. Carlson, 1988. "Rules versus discretion: making a monetary rule operational," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
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    Cited by:
    1. Hutchison, Michael M. & Sengupta, Rajeswari & Singh, Nirvikar, 2013. "Dove or Hawk? Characterizing monetary policy regime switches in India," Emerging Markets Review, Elsevier, Elsevier, vol. 16(C), pages 183-202.

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