Affiliation:
1. Centre For Development Studies , Thiruvananthapuram , Kerala , India
Abstract
Abstract
This paper analyzes the reaction function of monetary authority in India from 1997Q
1 to 2019Q
4 using nonlinear Taylor rule. It has been found that monetary policy reaction function (MPRF) in India is asymmetric and is influenced by the state of the economy, determined by the lagged interest rate. To capture such asymmetry, we have used a set of nonlinear models including smooth transition regression (STR) model, threshold regression (TR) model and Markov-switching regression (MSR) model along with the instrumental variable estimation technique. The analysis discloses that the behaviour of the Reserve Bank of India (RBI) is asymmetric, reacts aggressively to output gap in general and particularly during periods of high interest rate. Furthermore, the RBI reacts more to inflation and output gap during low volatile regimes in MSR models compared to high volatile regimes. We also found that there is a high degree of inertia in the policy rates of the RBI. The study concludes that nonlinear models may not only help in understanding the behaviour of the RBI but also prevent from making incorrect and misleading conclusions in Indian context.
Subject
Economics and Econometrics,Social Sciences (miscellaneous),Analysis,Economics and Econometrics,Social Sciences (miscellaneous),Analysis
Cited by
1 articles.
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