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Estimating a Monetary Policy Rule for India

Author

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  • Hutchison, Michael
  • Sengupta, Rajeswari
  • Singh, Nirvikar

Abstract

We investigate whether the seemingly discretionary and flexible approach of India’s central bank, the Reserve Bank of India (RBI), can in practice be described by a Taylor-type rule. We estimate an exchange rate-augmented Taylor rule for India over the period 1980Q1 to 2008Q4, allowing for potential structural shifts between the pre- and post-liberalization periods in order to capture the potential impact of macroeconomic and institutional changes on the RBI's monetary policy rule. Overall, we find that the output gap seems to matter more to the RBI than inflation, there is greater sensitivity to Consumer Price (CPI) inflation that Wholesale Price (WPI) inflation, and exchange rate changes do not play an important role in constraining monetary policy. Moreover, the post-1998 conduct of monetary policy seems to have changed in the direction of less inertia.

Suggested Citation

  • Hutchison, Michael & Sengupta, Rajeswari & Singh, Nirvikar, 2010. "Estimating a Monetary Policy Rule for India," MPRA Paper 21106, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21106
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    References listed on IDEAS

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    1. 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.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    3. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
    4. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    5. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
    6. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Kapur, Muneesh & Behera, Harendra, 2012. "Monetary Transmission Mechanism in India: A Quarterly Model," MPRA Paper 70631, University Library of Munich, Germany.
    2. Hutchison, Michael M. & Sengupta, Rajeswari & Singh, Nirvikar, 2013. "Dove or Hawk? Characterizing monetary policy regime switches in India," Emerging Markets Review, Elsevier, vol. 16(C), pages 183-202.
    3. Gupta,Poonam - DECOS, 2016. "Capital flows and central banking : the Indian experience," Policy Research Working Paper Series 7569, The World Bank.
    4. Muneesh Kapur & Michael Debabrata Patra, 2012. "Alternative Monetary Policy Rules for India," IMF Working Papers 12/118, International Monetary Fund.

    More about this item

    Keywords

    Reserve Bank of India; Monetary Policy; Taylor Rule; Indian Economy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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