Monetary transmission mechanisms, underlying inflation and monetary rules: the case of India and Pakistan.

Summary This empirical work focuses on three important topics concerning India and Pakistan. We use a VAR approach to examine different channels of transmission of monetary shocks to the real sector. Our estimates suggest the existence of the interest rate and bank credit channel. Knowing the importance of price stability, we estimate underlying inflation using different approaches. Our estimates suggest that underlying inflation, measured with the truncated mean and structural VAR approaches, is more effective for monetary policy. We analyze backward-looking and forward-looking monetary rules to see how central banks behave.