NEW MONETARY TRANSMISSION CHANNELS - ROLE OF INTEREST-RATES AND EXCHANGE-RATE IN CONDUCT OF INDIAN MONETARY-POLICY

This paper explores new dimensions in the monetary transmission mechan ism in the environment of liberalisation initiated in the early 1990s and in the context of growing integration of financial markets. An exa mination of the Chakravarty Committee paradigm in this changed milieu motivated us to see the role of two key variables in the conduct of mo netary policy, viz, interest rates and exchange rates. The long-run re lationship between money, prices, output, and exchange rate is examine d and the impact of money market disequilibrium on interest rats is tr aced by testing the joins significance of the lags of disequilibrium e rrors. We also conduct weak and block exogenity rests for exchange rat es. Interest rates and exchange rates are seen to be endogenously dete rmined in the liberalised regime beginning 1992-93, raising the possib ility of the change in transmission mechanism following the advent of financial reforms. The recent shifts in the operating procedure of mon etary policy are in consonance with our findings.