Monetary Policy, Trade Openness and Economic Growth in India Under Monetary-targeting and Multiple-indicator Approach Regimes

This article examines the role of monetary policy and trade openness to raise income in India for the monetary-targeting regime and the multiple-indicator approach regime of monetary policy. The impact of the key instruments of monetary policy, namely, money supply, interest rate and exchange rate, with trade openness on income, is assessed. Besides, how interest rate responds to monetary instruments, income and trade openness is studied. Empirical analysis finds a significant positive impact of the broad money supply, both in the short run and the long run, along with a negative long-run impact of the real interest rate and a positive impact of the real effective exchange rate in the variations of income. On the other hand, trade openness contributes to a rise in income in the short run, while its impact on the long run is negative. The interest rate has also responded to policy instruments, income and openness which indicates that the monetary policy is effective over the two monetary regimes