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Inflation Targeting for India The Implications of Limited Asset Market Participation

Author

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  • Tara Iyer

    (Department of Economics, University of Oxford.)

Abstract

This paper analyzes whether liquidity constraints matter for optimal monetary policy choices in an open economy. Asset market participation is limited as some agents lack financial capacity and behave in a hand-to-mouth fashion. I evaluate consumer welfare using a micro-founded welfare criterion derived through perturbation techniques, and find that the presence of liquidity constraints requires re-thinking conventional monetary policy design. Simple rules are ranked. While consumer price index (CPI) inflation targeting is appropriate in a fully Ricardian economy, a nominal exchange rate peg is shown to be least suboptimal when financial participation is low. The analysis is applied to the Indian context where monetary policy has recently been overhauled and a new CPI inflation targeting regime is being implemented.

Suggested Citation

  • Tara Iyer, 2015. "Inflation Targeting for India The Implications of Limited Asset Market Participation," NCAER Working Papers 110, National Council of Applied Economic Research.
    • Handle: RePEc:nca:ncaerw:110
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    Cited by:

    1. Oskolkov, Aleksei, 2023. "Exchange rate policy and heterogeneity in small open economies," Journal of International Economics, Elsevier, vol. 142(C).
    2. de Ferra, Sergio & Mitman, Kurt & Romei, Federica, 2020. "Household heterogeneity and the transmission of foreign shocks," Journal of International Economics, Elsevier, vol. 124(C).

    More about this item

    Keywords

    Open Economy Macroeconomics; General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Optimal Monetary Policy; Limited Asset Market Participation;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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