Monday, January 24, 2011

Monetary Policy Transmission in an Emerging Market Setting

NIPFP Working Paper 78

Rudrani Bhattacharya, Ila Patnaik and Ajay Shah
January 2011


Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchange-rate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.