Summary
Wealth adjustment process has been considered as an analytical framework for explaining the 'black box' dynamics of monetary policy transmission. Most renowned monetarist models like Brunner and Meltzer (1988) model used the wealth adjustment process effectively in order to explain the transmission mechanism of monetary policy. Although most of these models are termed as monetarist models, Keynesian interest rate mechanism is well-observed in these models. While considering the large number of empirical studies on the monetary policy transmission, the number of studies, which used the wealth adjustment process as the analytical framework, is less. Moreover, most of the studies on savings and investment in the Indian economy failed to go beyond their behavioral relations and in linking them with the transmission process. This study is an attempt to fill these gaps in the context of the Indian economy. The study initially examines the saving behaviour of alternative institutions in the economy with special reference to the households sector. Households' portfolio allocation process and interest rate reactions are examined through regression models. With the help of wealth adjustment process, it explains the monetary policy transmission in the Indian economy.
See the full content of this document
Extract
Dynamics of Monetary Policy Transmission in India[Dagger]
INTRODUCTION
Explanations to the dynamics of monetary policy transmission are generally concerned with questions such as, how monetary policy actions work upon the economy or how the economic activities are catalyzed by the policy impulses, etc. Basic macroeconomic frameworks heavily depend upon the dynamics of stock and flow interactions in explaining the macroeconomic fluctuations. Accordingly, the impact of monetary policy upon stock and flow interactions is the basic enquiry in most of the monetary policy transmission models. But the significance of specific relations is varied in alterative frameworks used for the analysis. Wealth adjustment process is one of the established frameworks for analyzing the transmission process of monetary policy1 in which initial impact of monetary policy is identified upon the financial asset portfolio. The restoration process of stocks (assets) and interactive flows relations and consecutive changes explain how the policy impulses transferred into macroeconomic outcomes.Rational economic agents maximize their utility function according to changes in their economic environment. This basic economic rationality is quite visible in the case of wealth accumulation process, where the agents are mainly concerned about the management of returns and risk in their possible wealth portfolio. Policy actions change economic environment and related level of returns and risk associated with wealth portfolios.A number of studies are available on the monetary policy transmission mechanism in the literature. However, we can see significant differences in the analytical frameworks employed in these studies. Studies like Bernanke and Gertler (1995) brought out the importance of 'cost of capital' arguments in ...See the full content of this document
Sponsored links
