Impact of domestic and foreign monetary policy on inflation interest rate and income inequality

Abstract

This thesis consist of three original essays on domestic as well as international spillover effect of monetary policy. The first chapter of this thesis is focused on India. We study the time varying effect of domestic monetary policy on aggregate, sectoral as well as disaggregate inflation in India. We have done this study using a large dataset of 439 variables to control for any omitted variable bias in small scale VAR model. The study also tries to underpin the transmission channel of monetary policy in India. The subsequent sacrifice ration of each manufacturing industry has also been calculated. The second chapter of thesis moves in direction of international economies. We calculate the degree of monetary impairment by samples of advance and emerging economies in response of U.S. monetary shock. We estimate the monetary impairment in a unified setting which control for any kind of reverse spillover among economies. We then classify economies on basis of capital account openness as well as exchange rate regime. The average monetary impairment of each subgroup has been calculated and compared to draw policy implication. The third chapter of this thesis further advances our understanding of international spillover of U.S. monetary shock. We study the effect of U.S. monetary shock on income inequality of other open economies. To answer this question, we developheterogeneous open economy New-Keynesian model. We explore and compare the effect of U.S. monetary shock among domestic inflation targeting regime (DIT),pegged exchange rate regime as well as the optimal monetary policy regime. We analytically derive the welfare loss function and rank the three policy regime accordingly. We further explore sensitivity of welfare with fraction of Ricardian agents as well as wage rigidities in economies. We then move for empirical investigation to test our theoretical prediction. Using a unbalanced panel of 52 economies, we estimated the effect of fed fund rate on income inequality of open economies.