Asymmetries in the monetary policy reaction function: evidence from India

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Irfan Ahmad Shah ◽  
Srikanta Kundu
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Nonlinear Models ◽  
Smooth Transition ◽  
Output Gap ◽  
Reaction Function ◽  
Switching Regression ◽  
High Interest Rate ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

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.

scholarly journals Monetary Policy Reaction Function in Positive and Normative Approaches: Evidence from ASEAN-3

2020 ◽  
Vol 6 (2) ◽  
pp. 95-98
Author(s):  
Pei-Tha Gan ◽  
Kok-Jing Yee ◽  
Norimah Rambeli@Ramli ◽  
Norasibah Abdul Jalil
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Terms Of Trade ◽  
External Factors ◽  
Output Gap ◽  
Economic Factors ◽  
Reaction Function ◽  
The Exchange Rate ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

A notable feature in many mainstream economic theories and empirical works of literature has been emphasized the conventional development in the domestic economic factors in dealing with monetary policy in both positive and normative approaches. However, external economic factors consist of potentially valuable information, such as the exchange rate and terms of trade, that cannot simply be ignored. To address this limitation, this study examines the monetary policy reaction function in an open economic model in both positive and normative approaches that encompasses the domestic and external factors, namely the inflation, the output gap, the exchange rate and the terms of trade. The empirical validity is obtained by using a sample of ASEAN-3 countries. Both the positive and normative approaches adopt the generalized method of moments and the grid search method, respectively. The findings deliver some policy implications; monetary policy via interest rate remains an important strategy in absorbing shocks from domestic and external factors, and the central bank should include important factors, namely the inflation, the output gap, the exchange rate and the terms of trade, in its monetary policy decision making that eventually help to attain the best economic outcomes.

Endogeneity of Monetary Policy Reaction Fun~tion: An Experience from Pakistan's Economy

1991 ◽  
Vol 30 (4II) ◽  
pp. 931-941
Author(s):  
M. Aynul Hasan ◽  
Qazi Masood Ahmed
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Money Supply ◽  
Relative Effectiveness ◽  
Reaction Function ◽  
Standard Result ◽  
Policy Variable ◽  
Target Values ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

Monetary policy, in general, refers to those steps taken by the Central Bank to achieve such broader objectives of the economy as growth, employment, external balance and price stability through changes in the money supply, interest rates and credit policies. The money supply thus created by the Central Bank should be in response to the changes in key macroeconomic target variables such as GNP, balance of payments, inflation, internal debt and unemployment. Indeed, a properly estimated monetary policy reaction function can provide useful information regarding such matters as to whether the Central Bank, in fact, has been systematically accommodating to the changes in the target variables. The reaction function can also provide insight into the question as to what should be the relevant indicators of the monetary policy. In addition, as argued by Havrilesky (1967), it may also play a crucial role in the formulation of long-term monetary policy strategy. The other important consideration in the development of a monetary policy reaction function pertains to the endogeneity of the monetary policy. As pointed out by Goldfeld and Blinder (1972), if a policy variable responds to the lagged (or expected) target values, then considering such a policy variable as exogenous would not only introduce the problem of misspecification but will also produce serious biases in the parameters estimated from those models. In particular, if the monetary policy variable happens to be strongly influenced by target variables, then the standard result of the relative effectiveness of the monetary policy vis-a-vis fiscal policy can be questionable on the grounds of reverse causation problem.

FINANCIAL STABILITY AND MONETARY POLICY REACTION FUNCTION FOR SOUTH ASIAN COUNTRIES: AN ECONOMETRIC APPROACH

2019 ◽  
pp. 1-30
Author(s):  
SAMIA NASREEN ◽  
SOFIA ANWAR
Keyword(s):  
Monetary Policy ◽  
South Asian ◽  
Financial Stability ◽  
Central Banks ◽  
Series Data ◽  
Reaction Function ◽  
Asian Countries ◽  
Policy Objective ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

This study empirically investigates a monetary policy reaction function for South Asian economies by incorporating financial stability as an additional policy objective in the central bank’s loss function. Empirical results are estimated by applying auto-regressive distributed lag (ARDL) approach to cointegration and vector autoregressive (VAR) approach using time-series data of five South Asian countries, namely, Pakistan, India, Bangladesh, Nepal and Sri Lanka. Estimated results indicate that monetary policy significantly reacts to the level of financial stability in all countries. The result further suggests that central banks would tighten monetary policy if output gap widens and exchange rate depreciate. In addition, central banks of Pakistan and India do not respond significantly to inflation gap.

scholarly journals Monetary Policy Reaction Function and Sterilization of Capital Inflows: An Analysis of Asian Countries

2011 ◽  
Vol 7 (9) ◽  
Author(s):  
Muhammad Saim Hashmi ◽  
Changsheng Xu ◽  
Muhammad Mahroof Khan ◽  
Mohsin Bashir ◽  
Faheem Ghazanfar
Keyword(s):  
Monetary Policy ◽  
Capital Inflows ◽  
Reaction Function ◽  
Asian Countries ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

scholarly journals Fiscal Policy Reaction Function and Sustainability of Fiscal Policy in Ukraine

2017 ◽  
pp. 22-35 ◽  
Author(s):  
Artem Vdovychenko
Keyword(s):  
Fiscal Policy ◽  
Smooth Transition ◽  
Mode Switching ◽  
Output Gap ◽  
Reaction Function ◽  
Passive Mode ◽  
Switching Regimes ◽  
Sustainability Of Fiscal Policy ◽  
High Output ◽  
Policy Reaction Function

This study analyzes the fiscal policy reaction function with switching regimes. We use Logistic Smooth Transition Regressions (LSTR) to show that fiscal policy in Ukraine during the study period remained largely in passive mode, switching to active mode during periods of a high output gap and elevated debt-to-GDP ratio. An important finding is that the fiscal policy reaction function is nonlinear. Specifically, the response of fiscal policy to the output gap is asymmetric: fiscal policy is pro-cyclical during periods of economic growth but neutral in recession.

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