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Inflation targeting in India: issues and prospects

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Author Info
Raghbendra Jha

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Abstract

This paper evaluates the case for inflation targeting (IT) in India. It states the objectives of monetary policy in India and argues that, with widespread poverty still present, inflation control cannot be an exclusive concern of monetary policy. The rationale for IT is spelt out and found to be incomplete. The paper provides some evidence on the effects of IT in developed and transition economies and argues that although IT may have been responsible for maintaining a low inflation regime, it has not brought down the inflation rate itself substantially and or changed the volatility of the exchange rate. Output movements in transition countries adopting IT have been higher than in developed market economies. I discuss India's experience with using nominal targets for monetary policy and why India is not ready for IT. Further, even if India's central bank wanted to, it could not pursue IT because the short-term interest rate does not have a significant effect on inflation. The paper concludes by listing monetary policy options for India.

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File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/02692170701880783&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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Publisher Info
Article provided by Taylor and Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 22 (2008)
Issue (Month): 2 ()
Pages: 259-270
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Handle: RePEc:taf:irapec:v:22:y:2008:i:2:p:259-270

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Related research
Keywords: inflation targeting; economic growth; India;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Raghbendra Jha & Anurag Sharma, 2001. "Structural Breaks and Unit Roots: A Further Test of the Sustainability of the Indian Fiscal Deficit," ASARC Working Papers 2001-08, Australian National University, Australia South Asia Research Centre. [Downloadable!]
  2. Luis Jácome & Francisco Vázquez, 2005. "Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean," Macroeconomics 0508011, EconWPA. [Downloadable!]
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  3. Arminio Fraga & Ilan Goldfajn & Andre Minella, 2003. "Inflation Targeting in Emerging Market Economies," NBER Working Papers 10019, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Laurence M. Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund. [Downloadable!]
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  5. Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 99/119, International Monetary Fund.
  6. Paul R. Masson, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  7. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May. [Downloadable!] (restricted)
  8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  10. Rachel Lomax, 2005. "Inflation Targeting in Practice: Models, Forecasts, and Hunches," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 251-265, September. [Downloadable!] (restricted)
  11. Dollar, David & Kraay, Aart, 2001. "Growth is good for the poor," Policy Research Working Paper Series 2587, The World Bank. [Downloadable!]
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  12. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  14. Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements. [Downloadable!]
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  15. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  16. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements. [Downloadable!]
  17. John B. Taylor, 2000. "The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules," Working Papers Central Bank of Chile 87, Central Bank of Chile. [Downloadable!]
  18. William Seyfried & Dale Bremmer, 2003. "Inflation Targeting as a Framework for Monetary Policy: A Cross-Country Analysis," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(3), pages 291-299. [Downloadable!] (restricted)
  19. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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