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An Empirical Analysis of the Monetary Policy Reaction Function in India

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  • Inoue, Takeshi
  • Hamori, Shigeyuki

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 uses monthly data from the period of April 1998 to December 2007. When the simple Taylor rule was estimated for India, the output gap coefficient was statistically significant, and its sign condition was found to be consistent with theoretical rationale; however, the same was not true of the inflation coefficient. When the Taylor rule with exchange rate was estimated, the coefficients of output gap and exchange rate had statistical significance with the expected signs, whereas the results of inflation remained the same as before. Therefore, the inflation rate has not played a role in the conduct of India’s monetary policy, and it is inappropriate for India to adopt an inflation-target type policy framework.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/842/1/200_inoue_hamori.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 200.

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Date of creation: Apr 2009
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Publication status: Published in IDE Discussion Paper. No. 200. 2009. 04
Handle: RePEc:jet:dpaper:dpaper200

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Related research

Keywords: DOLS; India; Monetary policy; Reaction function; Taylor rule;

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Cited by:
  1. Muneesh Kapur & Michael Debabrata Patra, 2010. "A Monetary Policy Model without Money for India," IMF Working Papers 10/183, International Monetary Fund.

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