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Evaluating inflation targeting as a monetary policy objective for India

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  • Mishra, Ankita
  • Mishra, Vinod

Abstract

This study formulates a small open economy model for India with exchange rate as a prominent channel of monetary policy. The model is estimated using the Instrumental Variable-Generalized Methods of Moments (IV-GMM) estimator and evaluated through simulations. This study compares different cases of domestic and CPI inflation targeting, strict and flexible inflation targeting, and simple Taylor type rules. The analysis highlights the unsuitability of simple Taylor-type monetary rules in stabilizing the Indian economy and suggests that discretionary optimization works better in stabilizing this economy. There seems to be a trade-off between output gap stabilization and exchange rate stabilization in flexible domestic inflation targeting and CPI inflation targeting respectively. However, flexible domestic inflation targeting seems a better alternative from an overall macro stabilization perspective in India where financial markets are still not sufficiently integrated to ensure quick transmission of interest rate impulses and existence of rigidities in the economy.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 4 ()
Pages: 1053-1063

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1053-1063

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: India; Inflation targeting; CPI; Taylor's rule; Monetary policy;

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References

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
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  12. Laurence Ball, 2000. "Policy Rules and External Shocks," Working Papers Central Bank of Chile 82, Central Bank of Chile.
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  15. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  16. Arminio Fraga & Ilan Goldfajn & Andre Minella, 2003. "Inflation Targeting in Emerging Market Economies," NBER Working Papers 10019, National Bureau of Economic Research, Inc.
  17. Ankita Mishra & Vinod Mishra, 2009. "Pre-Conditions For Inflation Targeting In An Emerging Economy - The Case Of India," Development Research Unit Working Paper Series 08-09, Monash University, Department of Economics.
  18. Ankita Mishra & Vinod Mishra, 2010. "A VAR Model of Monetary Policy and Hypothetical Case of Inflation Targeting in India," Development Research Unit Working Paper Series 15-10, Monash University, Department of Economics.
  19. Carl E. Walsh, 2009. "Inflation Targeting: What Have We Learned?," International Finance, Wiley Blackwell, vol. 12(2), pages 195-233, 08.
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Cited by:
  1. Ali, Syed Zahid & Anwar, Sajid, 2013. "Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity," Economic Modelling, Elsevier, vol. 31(C), pages 286-296.

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