The Financial Spillover Effects of Conventional and Post-2008 Unconventional US Monetary Policy on the Indian Economy

Abstract

This paper aims to study the spillover effects of conventional and unconventional US monetary policy, entered as an exogenous variable in the estimation, on the Indian economy and with particular emphasis on equity returns, bond yields and exchange rates. By adopting a Bayesian Vector Autoregressive (BVAR) framework, this paper approximates a posterior distribution for the model using Markov Chain Monte Carlo (MCMC) methods, following which inference for the impulse variables is conducted. In particular, this paper uses a ‘Giannone, Lenza and Primiceri’ (GLP) prior using a Metropolis-Hastings sampler. Results show overall less-than-significant changes to the exchange rate and bond yields and high responsiveness of the stock price index to policy shocks.