داو یا هاوک؟سوئیچ های مشخص رژیم سیاست پولی در هند

The past two decades have witnessed a worldwide move by emerging markets to adopt explicit or implicit inflation targeting regimes. A notable and often discussed exception to this trend, of course, is China which follows a pegged exchange rate regime supported by capital controls. Another major exception is India. It is not clear how to characterize the monetary regime or identify the nominal monetary anchor in India. Is central bank policy in India following a predictable rule that is heavily influenced by a quasi inflation target? And how has the monetary regime been affected by the gradual process of financial liberalization in India? To address these points, we investigate monetary policy regime change in India using a Markov switching model to estimate a time-varying Taylor-type rule for the Reserve Bank of India. We find that the conduct of monetary policy over the last two decades can be characterized by two regimes, which we term ‘Hawk’ and ‘Dove.’ In the first of these two regimes, the central bank reveals a greater relative (though not absolute) weight on controlling inflation vis-à-vis narrowing the output gap. The central bank however was found to be in the “Dove” regime about half of our sample period, focusing more on the output gap and exchange rate targets to stimulate exports, rather than moderating inflation. India thus seems to be following its own direction in the conduct of monetary policy, seemingly not overly influenced by the emphasis on quasi-inflation targeting seen in many emerging markets.

A major switch in the conduct of monetary policy has occurred in many nations over the past two decades. Although taking different forms, the switch has been towards more systematic rules and less discretion in the conduct of monetary policy. Many central banks in emerging markets have adopted formal inflation targets (ITs), including Brazil, Chile, Colombia, Czech Republic, Korea, Hungary, Israel, Peru, Philippines, Poland, South Africa, Thailand and Turkey. Other central banks have adopted systematic rules that de facto describe the behavior of the central bank's operating instrument response—usually interbank interest rates—to inflation, output gaps and the external environment. Rose (2007) argues that the move to IT regimes, either explicitly or implicitly (e.g. adopting systemic rules focusing on inflation), has created a new monetary system that is more stable than its predecessors such as exchange rate targeting and fixed exchange rates that existed in the erstwhile Bretton Woods system. Theoretical studies that derive optimal monetary policy rules, and empirical studies that investigate their use in practice, are now commonplace in the literature (e.g. Taylor, 1993, Clarida et al., 2000, Woodford, 1999, Woodford, 2001 and Giannoni and Woodford, 2002). Taylor (1993) formulated a policy rule by which the U.S. Federal Reserve adjusts the policy rate in response to past inflation and the output gap (actual less potential output). He showed that this rule described Federal Reserve policy performance quite well from 1987 to 1992. Using a quadratic loss function for the welfare objective of the central bank, Woodford (2001) provided a formal normative justification for following a Taylor-type rule under certain conditions. Many studies subsequently applied and developed this class of policy rules to examine the behavior of central banks in industrialized countries (e.g., Clarida et al., 2000), and several have been applied to emerging and developing economies (e.g. Aizenman et al., 2011 and Gonçalves and Salles, 2008). In fact, Gonçalves and Salles (2008) find that in a sample of 36 emerging market economies (13 of which implemented IT), the IT adopters experienced a greater decline in inflation and growth volatility compared to the non-adopters. In light of the 2008–09 global financial crisis, it may be premature to make a final judgment on the desirability and durability of IT regimes and whether their widespread adoption has actually ushered in a new era of global monetary stability. It is noteworthy that the two largest, most populous, and, arguably, dynamic emerging markets, China and India, have not adopted IT regimes and withstood the global financial crisis reasonably well. China follows a quasi-fixed exchange rate regime against the U.S. Dollar, accumulates massive international reserves and maintains tight capital controls to keep the parity unchanged (e.g. Glick and Hutchison, 2009 and Ouyang et al., 2010). In contrast, the monetary policy regime in India is less explicit and apparently more dynamic, with the authorities typically arguing that discretion is paramount in their policy decisions. 1 The objective of our paper is to investigate the nature of monetary policy rules in India, a country that has undergone substantial domestic financial development and deregulation over the past two decades and has also experienced significant integration with the global economy. These developments have potentially altered the financial environment and external constraints (e.g. balance of payments, exchange rates) facing the central bank (Reserve Bank of India, RBI), and may have influenced its operating procedures as well as its policy tradeoffs between output–inflation–exchange rate stabilization. These considerations, in turn, may have impacted the formulation of monetary policy rule in India as mentioned in Mohan (2006b). In particular, money market deregulation took place in 1987. Prior to that, the money market was highly regulated and the interest rate was essentially fixed.2 Since 1987 there has been much greater flexibility in money market rates, and the RBI started using it as the primary operating instrument of monetary policy. To this end, we investigate the monetary policy rule in India and whether simple Taylor-like policy rules—perhaps changing over time to account for the changing economic environment—may be employed to systematically describe RBI's actions. The RBI describes its own policy actions in terms of discretion, and states that a multitude of factors are taken into consideration when deciding the course of monetary policy. The question is whether the seemingly discretionary policy followed by the RBI may be empirically described by a systemic rule that allows for occasional regime switches. Thus, our paper focuses on the monetary policy rule followed in India. In doing so, our analysis contributes to the relevant literature by adopting a regime switching model along the lines of Hamilton (1989) to allow for multiple changes over time in central bank preferences between “Hawk” and “Dove” monetary regimes that, in turn, shift the central bank operating policy rule. Previous work for emerging markets has focused on a stable monetary policy rule (constant coefficients) over time or perhaps a discrete shift from one rule to another in line with a change in the central bank leadership, institutional change or political change.3 None has focused on monetary regime switching either in emerging market economies in general or in India in particular. Our approach, by contrast, allows for the Indian central bank to operate in either of two regimes, and switch from one regime to another, multiple times in response to changes in the macro-economic conditions (e.g. inflation rate, output gap, and the exchange rate). For example, at times the RBI may be primarily concerned with inflation in a “Hawk” regime, perhaps because inflation is viewed as the primary threat to economic stability, while at other times its focus may be shifted to stimulating output (“Dove” regime). These shifts may occur predictably over the business cycle or at other times, not necessarily representing an institutional change, but simply a complex policy rule that changes over time, shifting with a given probability in response to an evolving economic environment. Our application of the regime-switching model to Indian monetary policy is interesting in its own right. Much like the U.S. Federal Reserve, the RBI has seemingly responded to the state of the economy in an apparently discretionary and flexible manner. A former Deputy Governor of the RBI described their approach as follows, “Thus the overall objective has had to be approached in a flexible and time variant manner with a continuous rebalancing of priority between growth and price stability, depending on underlying macroeconomic and financial conditions.” ( Mohan, 2006a; italics our own). The question is whether the apparently discretionary and flexible approach of the RBI can systematically and empirically be described in practice by a Taylor-type rule, albeit with the possibility of regime switches. Based on description of the conduct of monetary policy by RBI officials, India appears to be a good candidate to be described by a regime switching model between Hawk and Dove regimes. No study to date has undertaken this line of research for India. In particular, only three studies that we are aware of have investigated monetary policy rules for India, none of which have considered regime-switching. In particular, Mohanty and Klau (2005) augment the Taylor rule to include changes in the real effective exchange rate. They use quarterly data from 1995 to 2002 for 13 emerging economies including India. They find that for India, the estimated inflation coefficient is relatively low whereas the output gap and real exchange rate change are significant determinants of the short-term interest rate. Virmani (2004) estimates monetary policy reaction functions for the Indian economy, with the monetary base (termed in the literature as the McCallum Rule) and interest rate (Taylor Rule) as alternative operating targets.4 He finds that a backward-looking McCallum rule tracks the evolution of the monetary base over the sample period (1992q3–2001q4) reasonably well, suggesting that the RBI acts as if it is targeting nominal income when conducting monetary policy. In addition, neither of these studies explores the Indian central bank's policy rule beyond the early 2000s. Finally, Hutchison et al. (2010) estimate monetary policy rules for India with more recent data but use structural breaks chosen a priori as opposed to model-based estimates of systemic regime switches.5 In the next section we discuss the evolution of monetary policy in India and related literature. We summarize some of the major changes that took place in this sphere. In the third section we explain the methodology and data used. We describe Woodford's version of the Taylor Rule, and how we adapt Hamilton's Markov switching method to the case of monetary policy rules. In the fourth section we present the estimation results. In particular, the Markov switching model identifies two distinct regimes, which we label ‘Hawk’ and ‘Dove.’ We begin with a model that focuses on domestic variables, and subsequently consider the role of exchange rate in monetary policy making following Taylor (2001). In the fifth section we conclude by summarizing our results and interpretation.

In this paper we investigate the conduct of monetary policy in India by estimating policy rules that may switch over time depending on the underlying macro-economic environment. The broader context is to explore the monetary policy regime of a large, dynamic, emerging market that apparently eschews the popular policy rule of explicit or implicit inflation targeting. Our primary question then is whether Indian monetary policy, usually described by RBI policymakers as highly discretionary, may in fact be described by simple policy rules, as has been the case for many central banks. That is, is the RBI more systematic in policy implementation than it claims and may its policy be accurately described by quasi-IT or Taylor rule? Our specific methodological approach is estimation of Taylor (1993) rules along the lines of Woodford (2001), but allowing for switches in the preferences of the central bank over time, using a regime-switching model (Hamilton, 1989). Overall, our results suggest that a regime-switching model may characterize RBI policy, with the regimes naturally characterized as Hawk and Dove regimes, over the 1987–2008 period. Based on the likelihoods of the two policy stances, the Dove regime appears to have been in force (at least 50% likelihood) about half of the entire period, comprising four (possibly five) well-defined episodes. The model estimates suggest that the RBI focuses relatively more on the output gap during the Dove regime, with attention to inflation being essentially the same across the Hawk and Dove regimes. We also found strong evidence that external considerations, represented here by movements in the nominal exchange rate, systemically influenced RBI policy over the sample period. This policy seems to have taken the standard form of responding to exchange rate depreciation (appreciation) by raising (lowering) the interest rate. However, there is also a possibility that the RBI took steps to depreciate the exchange rate in order to stimulate exports when the economy was relatively weak (i.e. when the economy was in regime 2). Our sample period ends in 2008, before the effects of the global financial crisis (GFC) were felt in the Indian economy. In this sense, we estimate our model during a period of relative “normalcy” in financial markets and monetary policy conditions, during which discussions and implementation of inflation targeting were taking place in emerging markets around the world. The GFC represents such extraordinary circumstances that central banks, including the RBI, have resorted to emergency measures to stabilize economies. This GFC episode is unique, characterized by very specific policy and statistical features not likely to be repeated. However, we would expect the broad statistical outlines of our model to eventually reemerge as markets and economies stabilize. This conjecture is on our agenda for future research to be pursued after a long enough period of time after the GFC has transpired to undertake meaningful econometric analysis. Nonetheless, several general characterizations of the RBI response to the GFC and its aftermath is evident. As is well known, the GFC introduced major shifts in policy-making regimes throughout the world, not only emerging markets. The U.S. Federal Reserve System, impacted immediately at the onset of the crisis, responded by reducing interbank interest rates to zero, creating numerous emergency special funding facilities to provide liquidity to financial institutions, and began a series of “quantitative easing” (QE) measures that amounted in large part to very substantial purchases of government long-term debt and mortgage-backed securities.20 By mid-2013, almost five years after the onset of the crisis, the Federal Reserve kept interbank rates at zero, expressed a commitment to zero interest rates for an extended period, and maintained QE operations. Similar emergency measures were taken by many central banks in advanced and emerging markets, including the European Central Bank, Bank of Japan, Bank of England, Central Bank of Brazil, and the Bank of Korea.21 These varied in intensity depending on country-specific conditions, but were common responses to world-wide liquidity shortages, fragile financial sectors, falling trade volumes and slowing economies. The RBI was no exception, responding vigorously to the crisis by loosening monetary policy with unprecedented alacrity. During the seven month period following the Lehman bankruptcy the RBI lowered interest rates sharply (the repurchase rate of the central bank was reduced by almost half, 425 basis points, as was the reverse repurchase rate), substantially reduced the cash reserve ratio of banks, and increased the total amount of primary liquidity to the financial system by over ten percent of GDP (Mohanty, 2013a).22 Shortly after the worst part of the crisis, however, India experienced a resurgence of headline inflation in the double-digit range combined with lower economic growth. Unlike the U.S. and Europe, the RBI raised interest rates to dampen inflation in a series of moves from early 2010 through early 2012. In conclusion, our study finds that the trend towards inflation targeting by central banks in emerging markets prior to the GFC was not followed by India. India, like China, did not adopt an IT or quasi-IT monetary regime—the RBI neither concentrated exclusively on inflation nor adopted a form of inflation targeting. Our empirical work finds that the output gap systemically played an important role, as did inflation, in determining policy actions. We also find that the RBI fluctuated between two distinct monetary regimes, which we term Hawk and Dove, where the relative emphasis switched between inflation and output respectively. However, our estimates also indicate a great deal of policy discretion followed by the RBI, as articulated by the central bank's own senior officials. With the advent of the GFC and its immediate aftermath, extraordinary monetary policy measures in India and elsewhere were quickly adopted. Inflation targeting was not at the forefront of monetary policy discussions for several years after the GFC and, where it had been adopted, the regime was usually suspended.23 Central banks moved towards discretion and away from policy rules, more in line with traditional monetary policy making in India. Nonetheless, discussion of IT and the case of Indian “exceptionalism” in its approach to the conduct of monetary policy will likely remerge when economies and financial markets fully recover from the GFC.