Nonlinear Monetary Policy Reaction Function and Macroeconomic Fundamentals in India

The hybrid Talor rule of the Reserve Bank of India (RBI) is the subject of the current study, which investigates nonlinearities in an open economy that includes a fiscal variable. The analysis employs a nonlinear cointegration approach and identifies policy preference asymmetries. The RBI prioritizes price stability due to the preference for inflation avoidance over recession. Fiscal variable plays a significant role in estimating the Taylor rule, which suggests that it is necessary to align fiscal and monetary policy in order to maintain the inflation within the designated range. Lastly, the nonlinear Talor rule findings not only aid in comprehending the central bank’s policy setting behavior but also prevent the drawing of inaccurate and misleading inferences.