Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5101665 | Journal of Policy Modeling | 2017 | 37 Pages |
Abstract
The constant natural interest rate assumption implicit in Taylor type feedback rules to assess the stance of monetary policy could be misleading at times, particularly because of the time-varying nature of the natural interest rate. In the post crisis period, reflecting a complex web of supply side, demand side, regulatory and global factors, natural rates of both advanced and emerging economies have been estimated in the literature to have altered considerably. Using a theoretical framework that combines the essence of Ramsay's growth model and the New-Keynesian macro-dynamics, and applying the Kalman filter estimation technique, this paper finds that India's estimated natural real interest rate in Q4 of 2014-2015 lied in a range of 0.6%-3.1%, even though core estimates point to a narrower range of 1.6%-1.8%. These estimates indicate that the real interest rate gap was negative in India for a major part of the last about ten years when CPI inflation was persistently high, implying that monetary policy stance of the Reserve Bank was largely accommodative rather than anti-inflationary.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Harendra Kumar Behera, Sitikantha Pattanaik, Rajesh Kavediya,