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Nonlinear Monetary Policy Reaction Function And Macroeconomic Fundamentals In India

Author

Listed:
  • Masudul Hasan Adil

    (Indian Institute of Technology Mandi, India)

  • Vishal Sharma

    (ICFAI Business School, Bengaluru, Karnataka, India)

  • Sana Fatima

    (Symbiosis School for Online and Digital Learning, Symbiosis International (Deemed University), Pune, India)

Abstract

The hybrid Talor rule of the Reserve Bank of India (RBI) is the subject of the current study, which investigates nonlinearities in an open economy that includes a fiscal variable. The analysis employs a nonlinear cointegration approach and identifies policy preference asymmetries. The RBI prioritizes price stability due to the preference for inflation avoidance over recession. Fiscal variable plays a significant role in estimating the Taylor rule, which suggests that it is necessary to align fiscal and monetary policy in order to maintain the inflation within the designated range. Lastly, the nonlinear Talor rule findings not only aid in comprehending the central bank’s policy setting behavior but also prevent the drawing of inaccurate and misleading inferences.

Suggested Citation

  • Masudul Hasan Adil & Vishal Sharma & Sana Fatima, 2025. "Nonlinear Monetary Policy Reaction Function And Macroeconomic Fundamentals In India," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 28(1), pages 15-34, April.
    • Handle: RePEc:idn:journl:v:28:y:2025:i:1b:p:15-34
    DOI: https://doi.org/10.59091/2460-9196.2516
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    More about this item

    Keywords

    Taylor rule; Flexible inflation targeting; Nonlinear unit root and cointegration; Asymmetries; India;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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