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Changes in Transmission Channels of Monetary Policy in India
The introduction of the Liquidity Adjustment Facility as an operating procedure for monetary policy in the post-reform period is a landmark event for monetary policy. This paper finds a structural break in the post-reform period corresponding to the introduction of LAF in 2000. Using Vector Auto Regression techniques on monthly data from April 1993 to March 2012, the paper also assesses the changing importance of various transmission channels of monetary policy in the pre-LAF and post-LAF periods. It is found that the bank lending channel remains an important means of transmission of monetary policy in India, but it has weakened in the post-LAF period. The interest rate and asset price channels have become stronger and the exchange rate channel, although weak, shows a mild improvement in the post-LAF period.
I would like to thank Romar Correa of the University of Mumbai, Partha Ray of IIM Kolkata and the anonymous reviewer for giving useful insights. This paper is a part of the author’s unpublished PhD thesis.
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