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Policy Focus: Monetary policy in India: is something amiss?

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Author Info

  • Riccardo Cristadoro
  • Giovanni Veronese

Abstract

Purpose – Indian monetary policy performed reasonably well in the past, while both strategy and operational framework were evolving on a par with domestic financial and monetary markets. The purpose of this paper is to document how this good track record came to an abrupt stop in recent years as inflation rose sharply and, more worryingly, expected inflation followed suit. Design/methodology/approach – This paper has analytical, empirical and policy dimensions. Given the recent surge in inflation in India, as well as in inflation expectations, a discussion of the role of monetary policy is needed. This is presented by resorting to survey evidence on expectations as well as to indirect evidence inferred from the market reactions to macroeconomic news. Findings – The authors documented the unhinging of inflation expectations in India in the aftermath of the financial crisis. The evidence gathered leads to the conclusion that both the monetary policy strategy and framework of the Reserve Bank of India would benefit from further evolution in the direction of a precisely defined and overarching objective (price stability), instead of the present multiplicity of goals, and of a well-defined operating target, enhancing the transparency, communication and signalling effect of policy moves. The authors suggest that embracing a flexible inflation targeting approach is a possible solution. Originality/value – This is a highly topical issue that has attracted a great deal of attention in policy discussions, both in India and in the region. Very few papers combine the analytical and empirical considerations in this topic. JEL classification: E52, E58

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Indian Growth and Development Review.

Volume (Year): 4 (2011)
Issue (Month): 2 (September)
Pages: 166-190

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Handle: RePEc:eme:igdrpp:v:4:y:2011:i:2:p:166-190

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Related research

Keywords: Asia; Fiscal policy; India; Inflation targeting; Monetary policy; Monetary policy rules;

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References

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  1. de Carvalho Filho Irineu E, 2011. "28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-46, July.
  2. Paolo Angelini & Francesco Lippi, 2007. "Did Prices Really Soar after the Euro Cash Changeover? Evidence from ATM Withdrawals," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 1-22, December.
  3. Eichengreen, B. & Masson, P. & Savastano, M. & Sharma, S., 1999. "Transition Strategies and Nominal Anchors on the Road to Greater Exchange-Rate Flexibility," Princeton Essays in International Economics 213, International Economics Section, Departement of Economics Princeton University,.
  4. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
  5. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2006. "Inflation Targeting And The Anchoring Of Inflation Expectations In The Western Hemisphere," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 19-52, December.
  6. Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 99/119, International Monetary Fund.
  7. Robert J. Barro & David B. Gordon, 1984. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  8. Refet S Gürkaynak & Andrew Levin & Eric Swanson, 2010. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from the U.S., UK, and Sweden," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1208-1242, December.
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Citations

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Cited by:
  1. Asongu, Simplice A, 2013. "New Empirics of monetary policy dynamics: evidence from the CFA franc zones," MPRA Paper 48495, University Library of Munich, Germany.
  2. Paul Levine, 2012. "Policy focus: Monetary policy in an uncertain world: probability models and the design of robust monetary rules," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 70-88, April.
  3. Asongu, Simplice A, 2013. "Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices," MPRA Paper 48494, University Library of Munich, Germany.

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