Spillovers of the U.S. Monetary Policy Uncertainty to India’s Real Economy: A Channel-Specific ARDL Analysis 7 3

Abstract

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