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

Abstract

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.