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Effectiveness of the monetary policy framework in present-day India : have financial variables functioned as useful policy indicators

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Abstract

In April 1998, the RBI, the Indian central bank, formally announced a shift in its policy framework from monetary targeting to a multiple indicator approach, and since then, under this framework, the bank has considered a range of economic andfinancial variables as policy indicators for drawing policy perspectives. This paper aims to examine the effectiveness of this current policy framework in India by analyzing the causal relationships of each indicator variable on the objectivevariables. The results reveal that, except for bank credit, all indicator variables considered in this study have a causal relationship with at least either output or price level, suggesting that most preannounced economic and financial variables have served as useful policy indicators under the multiple indicator approach.

Suggested Citation

  • Inoue, Takeshi, 2010. "Effectiveness of the monetary policy framework in present-day India : have financial variables functioned as useful policy indicators," IDE Discussion Papers 242, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  • Handle: RePEc:jet:dpaper:dpaper242
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    Keywords

    Causality; India; LA-VAR; Policy Indicator; RBI; Monetary policy; Central bank;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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