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Alternative Monetary Policy Rules for India

  • Muneesh Kapur
  • Michael Debabrata Patra
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    This paper empirically evaluates the operational performance of the McCallum rule, the Taylor rule and hybrid rules in India over the period 1996-2011 using quarterly data, with a view to analytically informing the conduct of monetary policy. The results show that forward-looking formulations of both rules and their hybrid version - setting a nominal output growth objective for monetary policy with an interest rate instrument - outperform contemporaneous and backward-looking specifications, especially when targeting core components of GDP and inflation, and combine the best parts of efficiency and discretion.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/118.

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    Length: 44
    Date of creation: 01 May 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/118
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    1. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
    2. Hutchison, Michael & Sengupta, Rajeswari & Singh, Nirvikar, 2010. "Estimating a monetary policy rule for India," MPRA Paper 38924, University Library of Munich, Germany.
    3. Raghbendra Jha, 2008. "Inflation targeting in India: issues and prospects," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 259-270.
    4. Esanov, Akram & Merkl, Christian & Vinhas de Souza, Lucio, 2005. "Monetary policy rules for Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 484-499, September.
    5. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    6. Sitikantha Pattanaik & G.V. Nadhanael, 2013. "Why persistent high inflation impedes growth? An empirical assessment of threshold level of inflation for India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 6(2), pages 204-220, September.
    7. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    8. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Working Paper 00-03, Federal Reserve Bank of Richmond.
    9. Joseph H. Haslag & Scott E. Hein, 1990. "Does it matter how monetary policy is implemented?," Research Paper 9009, Federal Reserve Bank of Dallas.
    10. W A Razzak, 2001. "Is the Taylor rule really different from the McCallum rule?," Reserve Bank of New Zealand Discussion Paper Series DP2001/07, Reserve Bank of New Zealand.
    11. Robert E. Hall & N. Gregory Mankiw, 1993. "Nominal Income Targeting," NBER Working Papers 4439, National Bureau of Economic Research, Inc.
    12. Meade, James E., 1977. "The Meaning of "Internal Balance"," Nobel Prize in Economics documents 1977-2, Nobel Prize Committee.
    13. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 207-228, April.
    14. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    15. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers 15/2008, Bank of Finland, Institute for Economies in Transition.
    16. John B. Carlson, 1988. "Rules versus discretion: making a monetary rule operational," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
    17. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
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