A Monetary Policy Model Without Money for India

ByMuneesh Kapur, Michael Debabrata Patra

August 1, 2010

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

A New Keynesian model estimated for India yields valuable insights. Aggregate demand reacts to interest rate changes with a lag of at least three quarters, with inflation taking seven quarters to respond. Inflation is inertial and persistent when it sets in, irrespective of the source. Exchange rate pass-through to domestic inflation is low. Inflation turns out to be the dominant focus of monetary policy, accompanied by a strong commitment to the stabilization of output. Recent policy actions have raised the effective policy rate, but the estimated neutral policy rate suggests some further tightening to normalize the policy stance.

Subject: Central bank policy rate, Exchange rates, Inflation, Output gap, Real interest rates

Keywords: GDP deflator, nominal exchange rate, open economy, Phillips curve, reverse repo, WP, WPI inflation movement

Pages:
62
Volume:
2010
DOI:
https://doi.org/10.5089/9781455202171.001
Issue:
183
Series:
Working Paper No. 2010/183
Stock No:
WPIEA2010183
ISBN:
9781455202171
ISSN:
1018-5941

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