Template-Type: ReDIF-Paper 1.0
Author-Name: Shesadri Banerjee
Author-X-Name-First: Shesadri
Author-X-Name-Last: Banerjee
Author-Name: M S Mohanty
Author-X-Name-First: M S
Author-X-Name-Last: Mohanty
Title: US monetary policy and the financial channel of the exchange rate: evidence from India
Abstract: The effect of US monetary policy on EMEs is one of the fiercely debated issues in international finance. We contribute to this debate using micro- and macro-level analyses from India over the period 2004-2019. Using a dynamic panel estimation model of non-financial firms, we show that US monetary tightening adversely affects firms’ net worth and reduces domestic credit relative to external credit. Using a sign-identified VAR model, we find that the contractionary US monetary policy leads to a significant downturn in the domestic credit and business cycles. The responses of firms and the impact on the domestic credit cycle suggest that the financial channel of the exchange rate is one of the conduits transmitting US monetary policy to India.
Length: 32 pages
Creation-Date: 2021-05
File-URL: https://www.bis.org/publ/work945.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work945.htm
File-Format: text/html
Number: 945
Keywords: US monetary policy, international transmission of monetary policy, dynamic panel estimation, sign-restricted VAR model, financial channel, Indian economy
Classification-JEL: E32, E52, F41, F42, F61, F62
Handle: RePEc:bis:biswps:945