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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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    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. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    3. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
    4. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
    5. 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, vol. 21(2), pages 207-228, April.
    6. Haslag, Joseph H. & Hein, Scott E., 1995. "Does it matter how monetary policy is implemented?," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 359-386, April.
    7. John B. Carlson, 1988. "Rules versus discretion: making a monetary rule operational," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
    8. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
    9. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
    10. Hutchison, Michael & Sengupta, Rajeswari & Singh, Nirvikar, 2010. "Estimating a monetary policy rule for India," MPRA Paper 38924, University Library of Munich, Germany.
    11. Meade, James E, 1993. "The Meaning of "Internal Balance."," American Economic Review, American Economic Association, vol. 83(6), pages 3-9, December.
    12. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    13. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers 15/2008, Bank of Finland, Institute for Economies in Transition.
    14. Esanov, Akram & Merkl, Christian & Vinhas de Souza, Lúcio, 2004. "Monetary Policy Rules for Russia," BOFIT Discussion Papers 11/2004, Bank of Finland, Institute for Economies in Transition.
    15. Raghbendra Jha, 2005. "Inflation Targeting In India: Issues And Prospects," CAMA Working Papers 2005-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    16. W. A. Razzak, 2003. "Is the Taylor Rule Really Different from the McCallum Rule?," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 445-457, October.
    17. 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, vol. 6(2), pages 204-220, September.
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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, vol. 16(C), pages 183-202.

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