<abstract xmlns="http://www.w3.org/1999/xhtml"><p>Employing Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of the model are estimated using Vector Autoregression framework, we analyse how changes in monetary policy variables impact inflation, output, money supply, and the financial sector in India. Our results for the period 2001:04 to 2016:03 show that the benchmark FAVAR model showed more reliable results than baseline VAR model. Benchmark FAVAR model shows the existence of weak ‘liquidity puzzle’ in India. The impulse responses from the FAVAR approach reveal that monetary policy is more efficient in explaining the variations in inflation rather than stimulating output indicating its effectiveness in attaining the objective of price stability.</p></abstract>

Employing Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of the model are estimated using Vector Autoregression framework, we analyse how changes in monetary policy variables impact inflation, output, money supply, and the financial sector in India. Our results for the period 2001:04 to 2016:03 show that the benchmark FAVAR model showed more reliable results than baseline VAR model. Benchmark FAVAR model shows the existence of weak ‘liquidity puzzle’ in India. The impulse responses from the FAVAR approach reveal that monetary policy is more efficient in explaining the variations in inflation rather than stimulating output indicating its effectiveness in attaining the objective of price stability.

Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach

Department of Humanities and Social Sciences

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution 4.0 International License.

Employing Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of...

Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach

Published Online: Sep 18, 2020

Page range: 163 - 182

Received: Mar 19, 2019

Accepted: Jun 27, 2019

DOI: https://doi.org/10.2478/jcbtp-2020-0042

Keywords
Factor Augmented VAR, Monetary policy, Economic growth, Inflation

© 2020 P Jithin et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach

Published Online: Sep 18, 2020

Page range: 163 - 182

Received: Mar 19, 2019

Accepted: Jun 27, 2019

DOI: https://doi.org/10.2478/jcbtp-2020-0042

KeywordsFactor Augmented VAR, Monetary policy, Economic growth, Inflation

© 2020 P Jithin et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Keywords
Factor Augmented VAR, Monetary policy, Economic growth, Inflation