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Is India ready for flexible inflation-targeting?

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  • Abhijit Sen Gupta

    ()
    (Asian Development Bank)

  • Rajeswari Sengupta

    ()
    (Indira Gandhi Institute of Development Research)

Abstract

In this paper we analyze whether the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards flexible inflation targeting. However we also find factors, which are traditionally outside the control of monetary policy do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.

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Bibliographic Info

Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2014-019.

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Length: 31 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:ind:igiwpp:2014-019

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Keywords: Reserve Bank of India; Monetary Policy; Taylor Rule; Financial trilemma; Inflation; Nominal anchor; Fiscal deficit;

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  1. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-01, C.V. Starr Center for Applied Economics, New York University.
  2. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9807, Universite de Montreal, Departement de sciences economiques.
  3. Janak Raj & Khundrakpam J K & Dipika Das, 2011. "An Empirical Analysis of Monetary and Fiscal Policy Interaction in India," Working Papers id:4504, eSocialSciences.
  4. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper 46217, University Library of Munich, Germany.
  5. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 232-237, May.
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