Identifying efficient policy mix under different targeting regimes: A tale of two crises

ABSTRACT

We examine the influence of demand shock, supply shock and the monetary policy shock on macroeconomic variables using the New Keynesian Dynamic Stochastic General Equilibrium framework. Our study tries to identify the efficient monetary policy mix as an antidote to the prevailing economic fragilities that originated due to the COVID-19 pandemic and geopolitical conflict in case of India and China. Under both simulated and Bayesian analysis, our findings revealed the inflationary effect of demand and supply shock with a target-oriented monetary policy under sticky prices as the efficient policy tool to counter these effects. The macroeconomic projections depicted the favourable influence of output due to active intervention of target-oriented monetary policy in both these economies.