Spillovers of the U.S. Monetary Policy Uncertainty to India’s Real Economy: A Channel-Specific ARDL Analysis

What the paper says

The Study empirically examines how uncertainty in the United States (U.S.) monetary policy affects India’s industrialoutput through the interest rate channel. The analysis uses monthly data from 1997 to 2020 and applies the AutoregressiveDistributed Lag (ARDL) bounds-testing approach to examine both short-run and long-run effects. The Toda–Yamamotomethod is also used to confirm the direction of causality. Monetary policy uncertainty is measured through the indexdeveloped by Husted, Rogers and Sun (2017), while the Leo Krippner Shadow Short Rate (LKSSR) is used as a measure ofthe actual U.S. policy stance. The model also accounts for major crisis periods such as the Asian financial crisis, the dot-comcollapse, the global financial crisis and the European debt shock. The results show that higher uncertainty in the U.S. policyreduces India’s industrial production in both the short and long term. Nearly half of the adjustment towards equilibriumtakes place within a month. Crisis periods make the impact stronger, which suggests that uncertainty shocks are moredamaging when global conditions are weak. The impulse response patterns show that the decline in industrial output issharpest about six to eight months after the shock and then settles by the second year. The dynamic multipliers confirmthat the adjustment is gradual and persistent. The main contribution of the study is the joint use of a forward-lookinguncertainty index and the shadow rate within a single, channel-specific framework. India’s one-year treasury yield, whichis highly correlated with India’s policy rate, viz, repo rate, is used to represent domestic financial conditions, as it remainsconsistent across changing policy regimes.