Search

The constant natural interest rate assumption implicit in Taylor type feedback rules to assess the stance of monetary policy could be misleading at times, particularly because of the time-varying nature of the natural interest rate. In the post crisis period, reflecting a complex web of supply side, demand side, regulatory and global factors, natural rates of both advanced and emerging economies have been estimated in the literature to have altered considerably. Using a theoretical framework that combines the essence of Ramsay’s growth model and the New-Keynesian macro-dynamics, and applying the Kalman filter estimation technique, this paper finds that India’s estimated natural real interest rate in Q4 of 2014–2015 lied in a range of 0.6%–3.1%, even though core estimates point to a narrower range of 1.6%–1.8%. These estimates indicate that the real interest rate gap was negative in India for a major part of the last about ten years when CPI inflation was persistently high, implying that monetary policy stance of the Reserve Bank was largely accommodative rather than anti-inflationary. [ABSTRACT FROM AUTHOR]

This paper examines whether the spread between long- and short-terminterest rates contains information about future economic activity in India. Using the yields on securities with maturities ranging from three months to ten years, we construct five different yield spreads at shorter end, longer end, and policy relevant area of the yield curve. We study the predictive power of each of these spreads for output growth within aggregate and time scale framework using wavelet methodology. We find that predictive power holds only at lower frequencies for the spreads which are constructed at shorter end and policy relevant areas of yield curve. However, spreads which are constructed at the longer end of the yield curve do not seem to have predictive information for output growth. [ABSTRACT FROM AUTHOR]