Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach

Author:

Jithin P1,Suresh Babu M1

Affiliation:

1. Department of Humanities and Social Sciences , Indian Institute of Technology Madras , Chennai , India

Abstract

Abstract Employing Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of the model are estimated using Vector Autoregression framework, we analyse how changes in monetary policy variables impact inflation, output, money supply, and the financial sector in India. Our results for the period 2001:04 to 2016:03 show that the benchmark FAVAR model showed more reliable results than baseline VAR model. Benchmark FAVAR model shows the existence of weak ‘liquidity puzzle’ in India. The impulse responses from the FAVAR approach reveal that monetary policy is more efficient in explaining the variations in inflation rather than stimulating output indicating its effectiveness in attaining the objective of price stability.

Publisher

Walter de Gruyter GmbH

Subject

Strategy and Management,Economics and Econometrics,Finance

Cited by 2 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. Inflation dynamics in the USA and EU: VAR analysis and forecasting;International Journal of Economic Practice and Policy;2023

2. Commodity futures prices pass-through and monetary policy in India: Does asymmetry matter?;The Journal of Economic Asymmetries;2022-06

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