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Issues in the Choice of a Monetary Regime for India

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  • Warwick J. McKibbin

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  • Kanhaiya Singh

Abstract

Economic liberalization and financial sector reforms in India commenced in 1990. An important issue currently facing India and the focus of a lively debate, is the question of the appropriate regime for conducting monetary policy in an economy undergoing structural reforms. To add to this important debate, this paper summarizes the state of the current policy debate on selecting a monetary regime for India and presents estimates of the impact of alternative monetary regimes in the face of a variety of shocks to the Indian economy. The impacts of shocks to aggregate demand, productivity growth and risk perceptions are considered under the three policy regimes of money targeting, inflation targeting and nominal income targeting. It is concluded that a monetary target performs worst among the three regimes while the results of income targeting are most encouraging. Inflation targeting only performs well for demand shocks but causes greater volatility in real output under both productivity shocks and risk reassessment shocks. As there is a general trend towards inflation targeting in industrialized economies, this particular results should give some caution to Indian monetary authorities in following the industrialized world in their choice of an inflation-targeting regime. The most likely shocks to face India in a period of structural reform are different to those facing industrialized economies and are less well handled under an inflation target regime compared to a nominal income-targeting regime.

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Paper provided by The Australian National University, Australia South Asia Research Centre in its series ASARC Working Papers with number 2000-01.

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Date of creation: May 2000
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Handle: RePEc:pas:asarcc:2000-01

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  1. Mishkin, F.S., 1998. "International Experiences with Different Monetary Policy Regimes," Papers 648, Stockholm - International Economic Studies.
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Cited by:
  1. Frankel, Jeffrey A., 2011. "A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity Exporters in Latin America," Working Paper Series rwp11-027, Harvard University, John F. Kennedy School of Government.
  2. Frankel, Jeffrey A., 2011. "How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?," Working Paper Series rwp11-015, Harvard University, John F. Kennedy School of Government.
  3. Guy Debelle, 2001. "The Case for Inflation Targeting in East Asian Countries," RBA Annual Conference Volume, in: David Gruen & John Simon (ed.), Future Directions for Monetary Policies in East Asia Reserve Bank of Australia.
  4. Bank for International Settlements, 2006. "Monetary policy in Asia: approaches and implementation," BIS Papers, Bank for International Settlements, number 31, May.
  5. Kaushik Bhattacharya, 2006. "Monetary policy approaches in India," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 74-102 Bank for International Settlements.
  6. Frankel, Jeffrey, 2003. "Experience of and Lessons from Exchange Rate Regimes in Emerging Economies," Working Paper Series rwp03-011, Harvard University, John F. Kennedy School of Government.

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