Book Description

Monetary authorities, in order to have an accurate assessment of the timing and effects of their policy on the economy, must have an understanding of the monetary transmissions that are present in their economies. Many studies on developing countries, whose financial system is characterized by the absence of organized markets for securities, presence of capital controls, and ceiling on bank borrowing and lending rates, have shown that credit channel is present. Since the beginning of the 1990s, there have been many structural and economic reforms and subsequent transition to new policy regimes in India, which has made the analysis of monetary transmission gain importance. This study examines the transmission of monetary policy in India. Considering the external constraints on monetary policy, a benchmark VAR model is used to examine the presence of bank lending channel, asset price channel, and exchange rate channel. The results suggest that bank lending channel plays an important role in the transmission of monetary policy, which aligns well with the theory, as India is a developing country.