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Monetary Transmission in the Indian Economy

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Abstract

This paper examines monetary transmission channels of India during the period 1998 to 2015. In a structural VAR framework, we use a non-recursive strategy to identify monetary policy shocks using monthly data while controlling for international factors like global interest rates and oil prices affecting the Indian economy. Our results confirm that a contractionary shock lowers inflation as well as long-term expectations on inflation and output, while output response is low and insignificant. We also find the presence of the exchange rate channel and evidence of a weak asset price channel in the Indian economy.

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Notes

  1. 1.

    This interest rate is an analytical approximation of the shadow rate in the Shadow Rate Term Structure Model (SRTSM) introduced by Black (1995).

  2. 2.

    During the 2008 Global Financial Crisis, additional liquidity support was provided (up to 1% of Net Demand and Time Liabilities) under the LAF and the auctions were held at daily frequency instead of reporting Fridays for fine-tuning liquidity. Other measures included direct intervention in the foreign exchange market, raising interest rates on Foreign Currency Non-Resident (B) and Non-Resident (External) Rupee Account deposits. This proved vital in containing liquidity constraints emanating from risk aversion in lending and lack of availability of external borrowing were contained.

  3. 3.

    After the introduction of the Marginal Standing Facility in 2011, it became the new upper bound for the corridor.

  4. 4.

    For a detailed discussion on alternate methods to identify the VAR, see Ramey (2016).

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Authors and Affiliations

  1. Department of Economics, Delhi School of Economics, University of Delhi, Delhi, India

    Pami Dua

  2. Department of Economics, University of Warwick, Warwick, UK

    Anshumaan Tuteja

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  1. Pami Dua
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  2. Anshumaan Tuteja
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Correspondence to Anshumaan Tuteja .

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Editors and Affiliations

  1. Delhi School of Economics, University of Delhi, Delhi, India

    Pami Dua

Appendix

Appendix

Table 3 List of variables and data sources
Full size table

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Dua, P., Tuteja, A. (2023). Monetary Transmission in the Indian Economy. In: Dua, P. (eds) Macroeconometric Methods. Springer, Singapore. https://doi.org/10.1007/978-981-19-7592-9_5

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