An Empirical Analysis of the Monetary Policy Reaction Function in India
AbstractThis paper empirically analyzes Indiaâ€™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 Indiaâ€™s monetary policy, and it is inappropriate for India to adopt an inflation-target type policy framework.
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Bibliographic InfoPaper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 200.
Date of creation: Apr 2009
Date of revision:
Publication status: Published in IDE Discussion Paper. No. 200. 2009. 04
Postal: Publication Office, IDE 3-2-2 Wakaba, Mihama-ku, Chiba-shi, Chiba 261-8545 JAPAN
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-08 (All new papers)
- NEP-CBA-2009-08-08 (Central Banking)
- NEP-MAC-2009-08-08 (Macroeconomics)
- NEP-MON-2009-08-08 (Monetary Economics)
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- 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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