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Alternative Monetary Policy Rules for India

Listed author(s):
  • Muneesh Kapur
  • Michael Debabrata Patra

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
Handle: RePEc:imf:imfwpa:12/118
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References listed on IDEAS
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  1. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
  2. 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.
  3. 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.
  4. Meade, James E, 1993. "The Meaning of "Internal Balance."," American Economic Review, American Economic Association, vol. 83(6), pages 3-9, December.
  5. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
  6. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
  7. Haslag, Joseph H. & Hein, Scott E., 1990. "Does it matter how monetary policy is implemented?," Working Papers 9009, Federal Reserve Bank of Dallas.
  8. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-1144, December.
  9. Hall, R.E. & Mankiw, N.G., 1993. "Nominal Income Targeting," Harvard Institute of Economic Research Working Papers 1650, Harvard - Institute of Economic Research.
  10. Raghbendra Jha, 2005. "Inflation Targeting In India: Issues And Prospects," CAMA Working Papers 2005-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  11. Hutchison, Michael & Sengupta, Rajeswari & Singh, Nirvikar, 2010. "Estimating a Monetary Policy Rule for India," MPRA Paper 21106, University Library of Munich, Germany.
  12. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  13. W. A. Razzak, 2003. "Is the Taylor Rule Really Different from the McCallum Rule?," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 445-457, October.
  14. 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.
  15. 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.
  16. Michael Debabrata Patra & Muneesh Kapur, 2012. "A monetary policy model for India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 5(1), pages 18-41, March.
  17. 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.
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