Nonlinear Monetary Policy Reaction Function and Macroeconomic Fundamentals in India

Authors

Masud Hasan Adil, Indian Institute of Technology MandiFollow
VISHAL SHARMA, ICFAI Business School, Bengaluru, KarnatakaFollow
Sana Fatima, Symbiosis School for Online and Digital Learning, Symbiosis International (Deemed University), Pune, IndiaFollow

Document Type

Article

Abstract

The hybrid Talor rule of the Reserve Bank of India (RBI) is the subject of the current study, which investigates nonlinearities in an open economy that includes a fiscal variable. The analysis employs a nonlinear cointegration approach and identifies policy preference asymmetries. The RBI prioritizes price stability due to the preference for inflation avoidance over recession. Fiscal variable plays a significant role in estimating the Taylor rule, which suggests that it is necessary to align fiscal and monetary policy in order to maintain the inflation within the designated range. Lastly, the nonlinear Talor rule findings not only aid in comprehending the central bank’s policy setting behavior but also prevent the drawing of inaccurate and misleading inferences.

Recommended Citation

Adil, Masud Hasan; SHARMA, VISHAL; and Fatima, Sana (2025) "Nonlinear Monetary Policy Reaction Function and Macroeconomic Fundamentals in India," Bulletin of Monetary Economics and Banking: Vol. 28: No. 1, Article 2.
DOI: https://doi.org/10.59091/2460-9196.2516
Available at: https://bulletin.bmeb-bi.org/bmeb/vol28/iss1/2

First Page

15

Last Page

34

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Country

India

Affiliation

Indian Institute of Technology Mandi