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Inflation targeting and price behaviour: evidence from India

Author

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  • Amlendu Dubey

    (Indian Institute of Technology Delhi)

  • Juhi Lohani

    (Indian Institute of Technology Delhi)

Abstract

We study the individual price behaviour in India using monthly item-wise CPI prices during 2011–2019 and explore the impact of implementation of inflation targeting on price behaviour. We find that inflation targeting has significantly reduced the frequency of price increases and increased the frequency of price decreases in India; however, it has not been successful in reducing the dispersions in price increases or price decreases, a measure of welfare cost of inflation. We find that another monetary policy event during our period of analysis, demonetization, led to fall in the spread of price increases and rise in the spread of price decreases. Further, we find that increase in monthly inflation increases the frequency of price increases and decreases the frequency of price decreases which is as per the expectations. Overall, our results have important implications for the effectiveness of monetary policy in India in achieving price stability.

Suggested Citation

  • Amlendu Dubey & Juhi Lohani, 2022. "Inflation targeting and price behaviour: evidence from India," Indian Economic Review, Springer, vol. 57(2), pages 265-284, December.
    • Handle: RePEc:spr:inecre:v:57:y:2022:i:2:d:10.1007_s41775-022-00148-7
    DOI: 10.1007/s41775-022-00148-7
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    More about this item

    Keywords

    Inflation targeting; Demonetization; Frequency of price changes; Inflation; India;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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