Purpose:

Though an accumulating body of work has analysed monetary policy transmission in India, few studies are examining the differential impact of monetary policy action. Against this backdrop, this study analyses the differential impact of monetary policy on aggregate demand, aggregate supply. and their components along with the general price level in India.

Design/Methodology/Approach:

The study develops a structural macroeconometric model that is primarily aggregate and eclectic. The Generalised Method of Movements (GMM) is used for estimation of behavioural equations, while as a Gauss Seidel algorithm is used for model simulation purposes.

Findings:

The results from both policy simulation experiments reveal the differential impact of monetary policy on the components of aggregate demand and aggregate supply. Further, both policy simulation experiments highlighted the relative importance of the income absorption approach as opposed to the expenditure switching effect.

Practical implication:

The results obtained in this study provides a strong framework for design the monetary policy framework. Which is since comprehension of differential impact of monetary policy action will have immense significance for the macroeconomic stabilization as the central bank will have to weigh the varying repercussion of its actions on different sectors.

Originality/value:

The paper will enrich the existing literature by providing a detailed account of the differential impact of monetary policy among the components of both aggregate demands as well as aggregate supply in response to an interest rate hike as well as a decrease in the money supply.