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Spread, volatility and monetary policy: empirical evidence from the Indian overnight money market

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  • Saurabh Ghosh
  • Indranil Bhattacharyya

Abstract

This study uses a GARCH model to estimate conditional volatility in the Indian overnight money market during the period 1999-2006. It finds that the bid-ask spread in the overnight market was positively related to conditional volatility during 1999-2002. This relationship, however, has undergone a structural break since 2002 and lagged spread, along with conditional variance of the call rate, played an important role in determining spread during 2002-2006, indicating the improvement in market microstructure in recent years. Regarding monetary policy measures and money market volatility, the empirical findings indicate that expansionary monetary policy reduces volatility of both the weighted average call rate and the bid-ask spread. Among individual policy instruments, announcement of cash reserve ratio changes have a negative impact on the volatility of both call rate and spread. The other policy variables like Bank Rate, repo and reverse repo rates have a mixed impact on volatility of call rate and spread.

Suggested Citation

  • Saurabh Ghosh & Indranil Bhattacharyya, 2009. "Spread, volatility and monetary policy: empirical evidence from the Indian overnight money market," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(2), pages 257-277.
  • Handle: RePEc:taf:macfem:v:2:y:2009:i:2:p:257-277 DOI: 10.1080/17520840903076622
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    References listed on IDEAS

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    1. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," International Finance 9707001, EconWPA.
    2. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," NBER Working Papers 6174, National Bureau of Economic Research, Inc.
    3. João Ricardo Faria & Miguel León-Ledesma, 2000. "Testing the Balassa-Samuelson Effect: Implications for Growth and PPP," Studies in Economics 0008, School of Economics, University of Kent.
    4. Vipul Bhatt & Arvind Virmani, 2005. "Global integration of India's Money Market : Interest rate parity in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 164, Indian Council for Research on International Economic Relations, New Delhi, India.
    5. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, pages 60-72.
    2. Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, pages 60-72.
    3. Saurabh Ghosh & Stefan Reitz, 2013. "Capital Flows, Financial Asset Prices and Real Financial Market Exchange Rate: A Case Study for an Emerging Market, India," Journal of Reviews on Global Economics, Lifescience Global, pages 158-171.
    4. Sunil Kumar & Anand Prakash & Krishna M. Kushawaha, 2017. "What Explains Call Money Rate Spread in India?," Working Papers id:11975, eSocialSciences.

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