Examining the Asymmetric Impact of Monetary Policy in India

Jeevan Khundrakpam

Margin: The Journal of Applied Economic Research, 2017, vol. 11, issue 3, 290-314

Abstract: Though an accumulating body of work has analysed monetary policy transmission in India, there are few studies examining the asymmetric aspect of the transmission. Against this backdrop, segregating the interest rate setting process captured by a Taylor rule type into unanticipated and anticipated components, this article analyses the asymmetric effects of monetary policy on aggregate demand and its components, and inflation in India using quarterly data from 1996–97Q1 to 2013–14Q3. It finds that unanticipated hikes and cuts in the policy rate have a symmetric impact on aggregate demand, but differentially impact the components. While the impacts on investment are negative and symmetric, they are asymmetric on private consumption, with only an unanticipated cut in policy rate having a significant negative impact. Government consumption is unaffected by monetary policy shocks. The impact of unanticipated interest rate changes on inflation is negative and symmetric. Anticipated policy rate changes also have a negative impact on aggregate demand and its components, except for government consumption, but between certain levels, such changes are ineffective, indicating a neutral impact. Anticipated policy rate changes have a negative impact on inflation at all levels. JEL Classification: C32, C51, E31, E52

Keywords: Monetary Policy; Asymmetry; Inflation; Policy Rate; Aggregate Demand; Unanticipated; Anticipated (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:11:y:2017:i:3:p:290-314

DOI: 10.1177/0973801017703500

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