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Estimating a monetary policy rule for India

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

This paper investigates whether the seemingly discretionary and flexible approach of the Reserve Bank of India can in practice be described by a Taylor-type rule. It estimates an exchange-rate-augmented Taylor rule for India over the period Quarter 1 of 1980 to Quarter 4 of 2008. It investigates monetary policy changes between the pre- and post-liberalization periods in order to capture the potential impact of macroeconomic structural changes on the RBI's monetary policy conduct. Overall, it finds that the output gap seems to matter more to RBI than inflation, there is greater sensitivity to consumer price inflation, exchange rate changes do not constitute an important policy factor, and the post-1998 conduct of monetary policy seems to have changed in the direction of less inertia.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38924.

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Date of creation: 18 Sep 2010
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Handle: RePEc:pra:mprapa:38924
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  1. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  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. 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.
  5. 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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