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Measuring monetary policy and its impact on the bond market of an emerging economy

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  • Rudra Sensarma
  • Indranil Bhattacharyya

Abstract

In view of multiple instruments used by many central banks in emerging market economies (EMEs), we derive a composite measure of monetary policy for India and assess its impact on the yield curve. Our results show that while monetary policy has the dominant impact among macroeconomic variables on the entire term structure, it is particularly strong at the shorter end and on credit spreads. Shifts in the level of the government yield curve and credit spreads also lead to changes in monetary policy. In terms of robustness, our measure performs better than a narrative-based measure of monetary policy available in the literature.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:macfem:v:9:y:2016:i:2:p:109-130
    DOI: 10.1080/17520843.2015.1123743
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    Cited by:

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    2. Chundakkadan, Radeef & Sasidharan, Subash, 2020. "Central bank's liquidity provision and firms' financial constraints," Economic Modelling, Elsevier, vol. 89(C), pages 245-255.
    3. Chundakkadan, Radeef & Sasidharan, Subash, 2019. "Liquidity pull-back and predictability of government security yield volatility," Economic Modelling, Elsevier, vol. 77(C), pages 124-132.
    4. Moumita Paul & Kalluru Siva Reddy, 2022. "US QE and the Indian Bond Market," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(1), pages 137-157, March.
    5. Aeimit Lakdawala & Rajeswari Sengupta, 2021. "Measuring monetary policy shocks in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-021, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Sashikanta Khuntia & Gourishankar S. Hiremath, 2019. "Monetary Policy Announcements and Stock Returns: Some Further Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(4), pages 801-827, December.

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    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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