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Estimating a Monetary Policy Rule for India

Hutchison, Michael and Sengupta, Rajeswari and Singh, Nirvikar (2010): Estimating a Monetary Policy Rule for India.

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We investigate whether the seemingly discretionary and flexible approach of India’s central bank, the Reserve Bank of India (RBI), can in practice be described by a Taylor-type rule. We estimate an exchange rate-augmented Taylor rule for India over the period 1980Q1 to 2008Q4, allowing for potential structural shifts between the pre- and post-liberalization periods in order to capture the potential impact of macroeconomic and institutional changes on the RBI's monetary policy rule. Overall, we find that the output gap seems to matter more to the RBI than inflation, there is greater sensitivity to Consumer Price (CPI) inflation that Wholesale Price (WPI) inflation, and exchange rate changes do not play an important role in constraining monetary policy. Moreover, the post-1998 conduct of monetary policy seems to have changed in the direction of less inertia.

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