Measuring Monetary Policy Shocks in Emerging Economies: Evidence from India

54 Pages Posted: 17 Aug 2021 Last revised: 20 Dec 2021

See all articles by Aeimit Lakdawala

Aeimit Lakdawala

Wake Forest University - Department of Economics

Rajeswari Sengupta

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: December 17, 2021

Abstract

In this paper we provide a template for constructing monetary policy shocks for emerging economies. Our approach synthesizes high-frequency financial market data with a narrative analysis of central bank communication and related media coverage. In the process we create a publicly available time-series database of policy dates and shocks for The Reserve Bank of India (RBI). In addition to capturing surprise changes to the RBI's policy rate, our shocks suggest that financial markets infer substantial information about the future path of the policy rate from RBI communication. Bond and stock markets react strongly to these monetary shocks but exhibit notable heterogeneity across governor regimes. Finally, we use the monetary shocks as external instruments to identify the impact on macroeconomic variables.

Keywords: monetary policy, Reserve Bank of India, event study, monetary transmission, structural VAR, external instruments

JEL Classification: E44, E52, E58, G10

Suggested Citation

Lakdawala, Aeimit and Sengupta, Rajeswari, Measuring Monetary Policy Shocks in Emerging Economies: Evidence from India (December 17, 2021). Available at SSRN: https://ssrn.com/abstract=3905642 or http://dx.doi.org/10.2139/ssrn.3905642

Aeimit Lakdawala (Contact Author)

Wake Forest University - Department of Economics ( email )

Winston Salem, NC
United States

HOME PAGE: http://aeimit.weebly.com

Rajeswari Sengupta

Indira Gandhi Institute of Development Research (IGIDR) ( email )

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