IDEAS home Printed from https://ideas.repec.org/a/blg/journl/v12y2017i2p206-219.html
   My bibliography  Save this article

Effects Of Monetary Shocks On Exchange Rate: Empirical Evidence From India

Author

Listed:
  • SHARMA Chandan

    (Indian Institute of Management Lucknow, India)

  • SETIA Rajat

    (National Institute of Financial Management, India)

Abstract

This paper examines the effect of monetary policy shocks on exchange rate in a Multiple Indicator Approach (MIA) framework. This study has employed a monetary policy index of key monetary policy instruments in India (Bank rate, Cash Reserve Ratio, Repo and Reverse Repo rates). The study finds the empirical evidence for puzzling behavior of price level and exchange rate. Both price and exchange rate increase initially in response to a contractionary policy shock. Policy shocks affect output, inflation and exchange rate to an appreciable extent over a forecasting horizon of one year.

Suggested Citation

  • SHARMA Chandan & SETIA Rajat, 2017. "Effects Of Monetary Shocks On Exchange Rate: Empirical Evidence From India," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 12(2), pages 206-219, August.
  • Handle: RePEc:blg:journl:v:12:y:2017:i:2:p:206-219
    as

    Download full text from publisher

    File URL: http://eccsf.ulbsibiu.ro/RePEc/blg/journl/12215sharma&setia.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
    2. Fank Smets, 1997. "Measuring Monetary Policy Shocks in France, Germany and Italy: The Role of The Exchange Rate," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 597-616, September.
    3. Jang, Kyungho & Ogaki, Masao, 2004. "The effects of monetary policy shocks on exchange rates: A structural vector error correction model approach," Journal of the Japanese and International Economies, Elsevier, vol. 18(1), pages 99-114, March.
    4. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
    5. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    6. Jang, Kyungho & Ogaki, Masao, 2003. "The Effects of Japanese Monetary Policy Shocks on Exchange Rates: A Structural Vector Error Correction Model Approach," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(1), pages 1-34, February.
    7. Olivier Coibion, 2012. "Are the Effects of Monetary Policy Shocks Big or Small?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 1-32, April.
    8. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    9. Hilde C. Bjørnland, 2008. "Monetary Policy and Exchange Rate Interactions in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 197-221, March.
    10. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June.
    11. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
    12. Koray, Faik & McMillin, W. Douglas, 1999. "Monetary shocks, the exchange rate, and the trade balance," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 925-940, December.
    13. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
    14. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
    15. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
    16. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    17. Agénor, Pierre-Richard & Aynaoui, Karim El, 2010. "Excess liquidity, bank pricing rules, and monetary policy," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 923-933, May.
    18. 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.
    19. 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.
    20. Gerlach, Stefan & Smets, Frank, 1995. "The Monetary Transmission Mechanism: Evidence from the G-7 Countries," CEPR Discussion Papers 1219, C.E.P.R. Discussion Papers.
    21. Kim, Soyoung, 2005. "Monetary Policy, Foreign Exchange Policy, and Delayed Overshooting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 775-782, August.
    22. Ankita Mishra & Vinod Mishra, 2010. "A VAR Model of Monetary Policy and Hypothetical Case of Inflation Targeting in India," Monash Economics Working Papers 15-10, Monash University, Department of Economics.
    23. Bhattacharyya, Indranil & Sensarma, Rudra, 2008. "How effective are monetary policy signals in India," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 169-183.
    24. Lutkepohl, Helmut & Reimers, Hans-Eggert, 1992. "Impulse response analysis of cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 53-78, January.
    25. Georgy Ganev & Krisztina Molnar & Krzysztof Rybinski & Przemyslaw Wozniak, 2002. "Transmission Mechanism of Monetary Policy in Centraland Eastern Europe," CASE Network Reports 0052, CASE-Center for Social and Economic Research.
    26. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    27. Akihiro Kubo, 2009. "The effects of a monetary policy shock: Evidence from India," Economics Bulletin, AccessEcon, vol. 29(3), pages 1530-1541.
    28. Ben S.C. Fung, 2002. "A VAR analysis of the effects of monetary policy in East Asia," BIS Working Papers 119, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:blg:journl:v:12:y:2017:i:2:p:206-219. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mihaela Herciu) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/feulbro.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.