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A Note on Differential Asymmetric Effects of Money Supply and Policy Rate Shocks in India

  • Khundrakpam, Jeevan Kumar

The paper attempts to analyse the asymmetric effects of money supply and policy rate shocks in India using quarterly data from 1996-97Q1 to 2011-12Q4. It finds that both the shocks impact real output growth and inflation in the short-run, but have a differential impact among components of aggregate demand. An unanticipated hike/cut in policy rate has a symmetric impact of reducing/increasing GDP growth arising due to a corresponding symmetric impact on investment growth only. In contrast, an unanticipated increase/decrease in money supply has an asymmetric impact– only an unanticipated increase in money supply increases private consumption growth and GDP growth, while there is no impact on the other components aggregate demand. An unanticipated hike/reduction in policy rate leads to a symmetric decline/rise in inflation. An unanticipated change in money supply leads to higher inflation, but a similar decrease in it has no significant impact on inflation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53058.

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Date of creation: Nov 2013
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Handle: RePEc:pra:mprapa:53058
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  1. Khundrakpam, Jeevan Kumar & Jain, Rajeev, 2012. "Monetary Policy Transmission in India: A Peep Inside the Black Box," MPRA Paper 50903, University Library of Munich, Germany.
  2. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
  3. Karras, Georgios, 1996. "Are the Output Effects of Monetary Policy Asymmetric? Evidence from a Sample of European Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 267-78, May.
  4. Ball, L. & Mankiw, N.G., 1992. "Asymmetric Price Adjustment and Economic Fluctuations," Harvard Institute of Economic Research Working Papers 1602, Harvard - Institute of Economic Research.
  5. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  6. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  7. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  8. Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306.
  9. Anna Florio, 2005. "Asymmetric monetary policy: empirical evidence for Italy," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 751-764.
  10. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
  11. Rhee, Wooheon & Rich, Robert W., 1995. "Inflation and the asymmetric effects of money on output fluctuations," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 683-702.
  12. Phil Bodman, . "Are the Effects of Monetary Policy Asymmetric in Australia?," MRG Discussion Paper Series 0406, School of Economics, University of Queensland, Australia.
  13. Shen, Chung-Hua, 2000. "Are the Effects of Monetary Policy Asymmetric? The Case of Taiwan," Journal of Policy Modeling, Elsevier, vol. 22(2), pages 197-218, March.
  14. Bhaumik, Sumon Kumar & Dang, Vinh & Kutan, Ali M., 2011. "Implications of bank ownership for the credit channel of monetary policy transmission: Evidence from India," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2418-2428, September.
  15. Tsiddon, Daniel, 1993. "The (Mis)Behaviour of the Aggregate Price Level," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 889-902, October.
  16. Jeevan Kumar Khundrakpam, 2013. "Credit Channel of Monetary Policy Transmission in India: How Effective and Long Is the Lag?," The IUP Journal of Applied Economics, IUP Publications, vol. 0(1), pages 26-49, January.
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