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Estimating Impacts of Monetary Policy on Aggregate Demand in India

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  • Khundrakpam, Jeevan Kumar

Abstract

Using a structural VAR model on quarterly data from 2000Q1 to 2011Q1, this paper estimated the impact of monetary policy on aggregate demand in India. The overall impact on aggregate demand is then decomposed to observe the differential impact among the various components. It finds that an interest rate hike has a significant negative impact on the growth of aggregate demand. However, the maximum impact is borne by investment demand growth and imports growth. Impact on private consumption growth and exports growth are relatively far more subdued, while there is hardly any cumulative impact on government consumption growth as it increases after some marginal fall initially. Variance decomposition analysis indicates that interest rate accounts for a significant percentage of the fluctuation in the growth of all the components of aggregate demand, except government consumption. Further, interest rate channel completely dominates exchange rate channel in monetary transmission, though the latter channel has non-negligible impact on investment and imports.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50902.

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Date of creation: Dec 2012
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Publication status: Published in RBI WORKING PAPER SERIES 18.2012(2012): pp. 1-20
Handle: RePEc:pra:mprapa:50902

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Keywords: Monetary transmission; SVAR; impulse responses; aggregate demand components;

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  1. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
  2. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  3. Balázs Vonnák, 2005. "Estimating the Effect of Hungarian Monetary Policy within a Structural VAR Framework," MNB Working Papers 2005/01, Magyar Nemzeti Bank (the central bank of Hungary).
  4. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
  5. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
  6. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  7. Allan H. Meltzer, 1995. "Monetary, Credit and (Other) Transmission Processes: A Monetarist Perspective," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 49-72, Fall.
  8. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  9. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
  10. Zoltán M. Jakab & Viktor Várpalotai & Balázs Vonnák, 2006. "How does monetary policy affect aggregate demand? A multimodel approach for Hungary," MNB Working Papers 2006/4, Magyar Nemzeti Bank (the central bank of Hungary).
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