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Macroeconomic factors and yield curve for the emerging Indian economy

Author

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  • Kakali Kanjilal

Abstract

This article investigates the dynamic linkages between the estimated parameters of a zero coupon yield curve and macroeconomic variables like inflation, gross domestic product growth in the presence of a monetary policy indicator in India for the period July 1997 to February 2004. The study finds that there exists strong causality from financial factors, defined by three parameters of the yield curves ('Level', 'Slope', 'Curvature') to macroeconomic factors; growth, inflation and monetary policy indicators (changes in the call money rate). However, the causality in the opposite direction is found to be weaker. It is found that theyield and macro factors do not cause each other before the launch of a liquidity adjustment facility, so the evidence of causality from financial to macroeconomic factors can be attributed to the introduction of a liquidity adjustment facility in June 2000. The causality from yield factors to macro factors is primarily driven by the fact that the 'changes in level' of yield curve brings an impact on inflation through the changes in monetary policy. This finding suggests that monetary policy plays a key role in driving the causality. This also implies that the indirect instrument of monetary policy mechanism is becoming increasingly important to influence the aggregate demand in the economy.

Suggested Citation

  • Kakali Kanjilal, 2011. "Macroeconomic factors and yield curve for the emerging Indian economy," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 4(1), pages 57-83.
    • Handle: RePEc:taf:macfem:v:4:y:2011:i:1:p:57-83
    DOI: 10.1080/17520843.2011.548612
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    Citations

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    Cited by:

    1. Chundakkadan, Radeef & Sasidharan, Subash, 2019. "Liquidity pull-back and predictability of government security yield volatility," Economic Modelling, Elsevier, vol. 77(C), pages 124-132.
    2. Lange, Ronald Henry, 2018. "The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 164-182.
    3. Rudra Sensarma & Indranil Bhattacharyya, 2016. "Measuring monetary policy and its impact on the bond market of an emerging economy," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(2), pages 109-130, July.
    4. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    5. Sensarma, Rudra & Bhattacharyya, Indranil, 2016. "The impact of monetary policy on corporate bonds in India," Journal of Policy Modeling, Elsevier, vol. 38(3), pages 587-602.
    6. Kanjilal, Kakali, 2013. "Factors causing movements of yield curve in India," Economic Modelling, Elsevier, vol. 31(C), pages 739-751.
    7. Kakali Kanjilal, 2014. "Rational expectation hypothesis: empirical evidence from government debt market in India," International Journal of Indian Culture and Business Management, Inderscience Enterprises Ltd, vol. 9(3), pages 353-370.

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