Picking long term lag? Whether the impact is

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Picking up from the first hypothesis, second
hypothesis deals with the problem statement of how MP actions impact various
sectors of the economy. Whether the transmission of rates happen after a short term
lag or a long term lag? Whether the impact is same or is asymmetric across various
sectors of the economy? Main focus of central banks especially in EMEs countries
has been to maintain inflation at a manageable level. India being no different
in this regard with RBI adopting an inflation targeting regime by mostly using
short term interest rate tools like LAF as primary instrument of control to
influence economic growth and development. Monetary policy tools of control are
the way by which RBI tries to influence the real economic aggregates such as
Gross Domestic Product, both core and headline inflation and employment.

 

Review of relevant literature on monetary policy transmission
mechanism throws some interesting facts but also highlights the complexity
associated with it. These complexities generally arise from the fact monetary
policy transmission of interest rates through different channels by itself is changing,
long drawn and with presence of uncertainty in time lags and the impact on
target economic variables is quite asymmetric. From the theory of monetary
economics, under the long run equilibrium state, monetary policy has a neutral
effect on the aggregate output.1 But on the other hand monetary policy
stance starts showing the effect in short to medium term periods. Monetary policy
rate changes are felt first on short term money markets and within short time
the effect percolates to influence the exchange rates. These induced changes,
start showing in the consumption and buying behavior of consumers as well as in
producer’s output. These monetary policy shocks affect prices and national
output through the complex web of Picking up from the first hypothesis, second
hypothesis deals with the problem statement of how MP actions impact various
sectors of the economy. Whether the transmission of rates happen after a short term
lag or a long term lag? Whether the impact is same or is asymmetric across various
sectors of the economy? Main focus of central banks especially in EMEs countries
has been to maintain inflation at a manageable level. India being no different
in this regard with RBI adopting an inflation targeting regime by mostly using
short term interest rate tools like LAF as primary instrument of control to
influence economic growth and development. Monetary policy tools of control are
the way by which RBI tries to influence the real economic aggregates such as
Gross Domestic Product, both core and headline inflation and employment.

 

Review of relevant literature on monetary policy transmission
mechanism throws some interesting facts but also highlights the complexity
associated with it. These complexities generally arise from the fact monetary
policy transmission of interest rates through different channels by itself is changing,
long drawn and with presence of uncertainty in time lags and the impact on
target economic variables is quite asymmetric. From the theory of monetary
economics, under the long run equilibrium state, monetary policy has a neutral
effect on the aggregate output.1 But on the other hand monetary policy
stance starts showing the effect in short to medium term periods. Monetary policy
rate changes are felt first on short term money markets and within short time
the effect percolates to influence the exchange rates. These induced changes,
start showing in the consumption and buying behavior of consumers as well as in
producer’s output. These monetary policy shocks affect prices and national
output through the complex web of financial, securities and assets markets. Therefore,
it becomes very difficult to separate out the effects of these different
transmission channels on economic aggregates. In order understand these complex
relationships and asymmetries that define monetary policy transmission channels,
analytical statistical and econometric tools have been employed to quantify the
extent as well as direction of impact from the changes in RBI policy rates.financial, securities and assets markets. Therefore,
it becomes very difficult to separate out the effects of these different
transmission channels on economic aggregates. In order understand these complex
relationships and asymmetries that define monetary policy transmission channels,
analytical statistical and econometric tools have been employed to quantify the
extent as well as direction of impact from the changes in RBI policy rates.

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