Monetary Policy Shocks and Macroeconomic Variables: Evidence from India

Monetary policy has become an important part of any economic policy functioning in different countries of the world. Price stability has become the main objective of monetary policy keeping in mind economic growth. Since the deregulation of interest rate in 1994-1997, monetary transmission mechanism...

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Bibliographic Details
Published in:Journal of Economic Policy and Research 2020-10, Vol.16 (1), p.2-17
Main Authors: Pradhan, Sewak, Raju, G Raghavender
Format: Article
Language:English
Subjects:
Bank deposits
Banking
Central banks
Depreciation
Deregulation
Economic activity
Economic growth
Economic stabilization
Foreign exchange rates
Globalization
Industrial production
Inflation
Interest rates
Loans
Macroeconomics
Monetary policy
Money
Objectives
Petroleum
Price levels
Prices
Public sector
Stock exchanges
Variables
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Summary:Monetary policy has become an important part of any economic policy functioning in different countries of the world. Price stability has become the main objective of monetary policy keeping in mind economic growth. Since the deregulation of interest rate in 1994-1997, monetary transmission mechanism (the process of fulfilling the objectives of monetary policy) in India has under gone certain change. The globalisation of economy created more complexities in conduct of monetary policy with exposure to exogenous factors like oil price shock and federal fund rate. The Reserve Bank of India also made several changes in the base rate system in order to improve monetary transmission mechanism. A structural vector autoregressive model has been proposed and monthly data has been incorporated after post-liberalisation period April 1996 - March 2017. Contractionary monetary policy has had adverse impact on output growth for a long run and increases the price level for short term in contrast to its decline and rises the issue of price puzzle'. The depreciation of exchange rate also encourages exporters to increase industrial production in turn raises the average price level due to increase in import cost. Exogenous factors like oil price shocks have negative impact on domestic output growth and raise inflation for long time horizon. This also propels to decrease stock prices marginally and also in turn effect exchange rate adversely. Increase in the US federal fund rate have detrimental effect on output growth for a year and has an immediate sharp impact on call money rate. Transmission from policy repo rate to marginal cost of lending rate (MCLR) has been found more than the transmission to Base rate system. Private sector banks respond faster contrary to the magnitude of Public sector banks.
ISSN:0975-8577