A Re-look at the Long-Run Stability of the Money Multiplier in India

Results on long-run stability of M1 and M3 money multipliers in India are presented after the BoP crisis. Allowing for in-sample regime switching it is found that M3 money multiplier can be characterized by a one-time regime shift around the beginning of 1997, the time when money markets reform first begun in a big way, with issuance of ad hoc 14-day on tap T-Bills giving way to Ways and Means Advances. Results on the stability of M1 multiplier are less clear and relationship, if it exists, is statistically weak. Although evidence from CUSUM-SQ tests and recent (more powerful) unit root tests suggests that M1 and adjusted monetary base are cointegrated.

Operationalising Taylor-type Rules for the Indian Economy: Issues and Some Results (1992Q3 2001Q4)

This study is an attempt to formulate a monetary policy reaction function for India. In particular I model backward and forward looking Taylor and McCallum rules for the period post BoP crisis. It is found that backward-looking McCallum rule tracks the evolution of monetary base over the sample period reasonably well, suggesting that RBI acts as if it is targeting nominal income when conducting monetary policy. Recent declaration by the RBI that reserve money is its operating target (Annual Reports, 2001-02 and 2002-03) lends support to the findings of the study.

Fan Charts as Useful ‘Maps’ for an Inflation-Targeting Central Bank: An Illustration of the Sveriges Riksbank’s Method for Presenting Density Forecasts of Inflation

In this study I illustrate the usefulness of Fan Charts for a central bank and show how they can be used to present its viewpoint on likely paths of future inflation. Exploiting a bivariate unobserved components model, I use the methodology followed by Blix and Sellin (1998) to demonstrate how subjective judgements can be systematically incorporated into model-based forecasts and effectively presented in a graphic manner.

Estimating Output Gap for the Indian Economy: Comparing Results from Unobserved-Components Models and the Hodrick-Prescott Filter

Output gap estimates are constructed for India using unobserved components model (UCM) approach on the lines of Watson (1986) and Kuttner (1994). Results from UCMs are not found to be any less sensitive to data revisions when compared to those from the Hodrick-Prescott filter. This, however, could be because of lack of sufficient ‘revised-data’ on which the sensitivity of the results can be tested. Based on standard deviation of change in potential output to data revisions and its ‘economic’ content, the UCM using trimmed mean as the numeraire for inflation comes forth as the best choice. Alternative estimates of “core” inflation, included as a state variable in one of the UCMs, are also provided

Unit Root Tests: Results from some recent tests applied to select Indian macroeconomic variables

Results from newly developed unit roots tests of ERS (1996), PN (1996), NP (2001) and LM (1994) are compared against their traditional counterparts (ADF, PP and KPSS) on select Indian macroeconomic data. Results from ERS, PN and NP are broadly in agreement. However, using the general to specific criterion of Hall (1994) and the Modified Information Criterion (MIC) of NP for lag length selection, it is found that different lag length can lead to different results. Furthermore, results from using these criteria are also sensitive to the maximum lag length. Both KPSS and its modified version, LM, are found to be prohibitively sensitive to the lag length used. Since as of now no theoretical criterion exists for lag length selection for tests which test the null of stationarity, their use should be avoided, even for the purpose of so-called ‘confirmation’. Another important finding is that frequency of the data and span covered by the sample size plays an important role and whenever feasible, tests must be conducted with as many different frequencies as the availability of data permits. It is not only a large sample size that is important, but also the span covered, an issue raised long ago by Campbell and Perron (1991).

Distribution of Cross-Section of Price Changes and Measurement of Inflation

In this study we look at the statistical properties of components forming the Wholesale Price Index (WPI), the headline inflation index for the Indian economy. We find that not only is the distribution of price changes at the disaggregate level highly leptokurtic, but also the cross-sectional distribution of price changes is positively skewed. This has the implication that the weighted mean would fail to be an efficient estimator of inflation. Trimmed Means, belonging to the class of limited influence estimators, have been used by many central banks to get around the skewness problem. We also explore the use of trimmed means for efficiently estimating inflation for India. In particular, we study the robustness of trimmed means to the benchmark (Centered Moving Average vs. trends derived from the Hodrick Prescott Filter) and the evaluation criteria (Mean Absolute Deviation vs. Root Mean Square Error vs. an Asymmetric Loss Function). Although we study the performance of trimmed means against the weighted mean in some detail, we stop short of proposing any ‘one’ trimming pattern as the ideal. The selection of the headline inflation rate depends as much on its ability to track the underlying trend void of transitory disturbances as much on its ability to forecast future inflation and its correlation with money growth, something we don’t deal with in the present study.

Developing a Back Series of Monthly and Quarterly National Income Estimates for India: 1983Q1 – 1999Q4 (1993-94 = 100)

In this study we present estimates of monthly and quarterly GDP for India starting 1983-84. Following the recommendations of the CSO (KK,2000) we interpolate annual GDP by economic activity using appropriate physical indications as the basis. Results are compared against the estimates provided by the CSO for the years 1996-97 onwards.

Assessing NSEs Daily Zero Coupon Yield Curve Estimates: A Comparison with Few Competing Alternatives

This study assesses and compares, on select criteria of evaluation, the time series of daily term structure estimates provided by the National Stock Exchange (NSE) [using the Nelson-Siegel (1987; NS) methodology] with author’s own estimates of NS, Svensson (1992; SV) and Cox-Ingersoll-Ross (1985; CIR). While no model comes across as best on all criteria of evaluation, NS as estimated by NSE (and in this study) turn out to be the worst of the lot. Wherever CIR comes out to be better than SV, however, the difference is only marginal. As none of the models came out to be best on all days, given the numerical tractability of parsimonious models and availability of relatively cheap computing resources, it is suggested that NSE report estimates based on 3/4 competing specifications and not just using NS, which should be phased out. A suitable alternative exists in SV. [Preliminary Draft. Please Dont Quote]

On Estimability of Parsimonious Term Structure Models: An Experiment with Three Popular Specifications

This study addresses operational issues in estimation of parsimonious term structure models. When using price errors, objective function in term structure estimation is a highly non-linear function of the parameters. This necessary entails using numerical optimization techniques for estimation, which brings to fore the issue of (sensitivity of results to) the choice of initialization of the optimization routine. This study assesses the sensitivity of the final objective function value and the final parameter vector to the choice of the initial vector for three popular specifications, namely, Nelson-Siegel (1987), Svensson (1994), and Cox-Ingersoll-Ross (1985). It turns out that given the nature of the objective function, the choice of the starting vector is far from obvious in all three cases. There exist regions in the shape of the objective function in all three where a slight change in (seemingly reasonable) initial vector takes one far from optimum. Choice of the (range of) ‘best’ starting vector turns out to be an empirical matter. Grid search is recommended. One must first get to a subset of initial values which results in the objective function value near the minimum and then assess the sensitivity of the final parameter vector to those (subset of) initial values. The study illustrates the process using a typical trading day’s data. [Preliminary Draft. Please Don’t Quote]

Examination of the Credit Channel of Monetary Transmission in India: Results from Response of Commercial Banks’ Balance Sheet to a Monetary Policy Shock

In this study I present some evidence on the credit channel of monetary transmission in India. Using the set up of Bernanke and Blinder (1992) it is found that loans, investments and deposits of commercial banking system respond significantly to a monetary policy shock. Results to a positive shock to monetary base are as expected. Investments respond almost immediately and then taper whereas deposits permanently settle at a higher level. Loans respond more slowly and are seen to move contemporaneously with output after a lag of 8-12 months.