Wednesday, April 20, 2011

29 April 2011: Changes in Monetary Policy and Credit Demand - Panel Data Analysis for India and Some Emerging Market Economies

B. L. Pandit

The impact of changes in policy rates on the demand for bank credit and thereby on the pace of economic activity in emerging market economies like India, is an interesting question. EMEs in the sample are Brazil, India, Chile, Korea, Mexico, South Africa and Turkey. The period of study is 2002-2010— the post reform period, preceded by extensive reforms in banking and the financial sector. Citing greater degree of uncertainty surrounding economic activity in developing countries, it has been argued that since changes in policy rates are incremental in nature, these would be rather ineffective in initiating any substantive changes in the real sector. The recent surge in global capital flows in open EMEs has added another challenge to the very existence of an independent monetary policy. This paper is a part of a larger research project about monetary policy in India and some other EMEs. The specific question we address in this first study is ,to examine, to what extent do changes in policy rates influence the credit demand in EMEs. Using data from the panel of seven EMEs, GLS estimates are obtained by using Fixed Effect and Random Effect models. In contrast to the general perception, our data analysis and econometric results suggest a close association between the policy rate and credit demand and this association runs through what can be called policy rate channel- a hybrid of the traditional “interest rate channel” and “credit channel”.

Date: April 29, 2011
Time: 10:00 A.M.

ICRIER Conference Room,
Core 6A, 4th Floor,
India Habitat Centre, Lodi Road,
New Delhi – 110 003(INDIA)


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