Estimating Impacts of Monetary Policy on Aggregate Demand in India

Khundrakpam, Jeevan Kumar (2012): Estimating Impacts of Monetary Policy on Aggregate Demand in India. Published in: RBI WORKING PAPER SERIES , Vol. 2012, No. 18 (December 2012): pp. 1-20.

Abstract

Using a structural VAR model on quarterly data from 2000Q1 to 2011Q1, this paper estimated the impact of monetary policy on aggregate demand in India. The overall impact on aggregate demand is then decomposed to observe the differential impact among the various components. It finds that an interest rate hike has a significant negative impact on the growth of aggregate demand. However, the maximum impact is borne by investment demand growth and imports growth. Impact on private consumption growth and exports growth are relatively far more subdued, while there is hardly any cumulative impact on government consumption growth as it increases after some marginal fall initially. Variance decomposition analysis indicates that interest rate accounts for a significant percentage of the fluctuation in the growth of all the components of aggregate demand, except government consumption. Further, interest rate channel completely dominates exchange rate channel in monetary transmission, though the latter channel has non-negligible impact on investment and imports.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary transmission, SVAR, impulse responses, aggregate demand components
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

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