Inflation Targeting in India: Issues and Prospects
AbstractInflation targeting (henceforth IT) has emerged as a significant monetary policy framework in both developed and transition economies. It has been in place for a decade or more in a number of countries - with around 20 central banks adopting it as their basic monetary policy framework. Some authors have argued that for transition economies undergoing sustained financial liberalization and integration in world financial markets IT is an attractive monetary policy framework. Consequently there is some pressure for such economies to adopt IT as a core element in their monetary policy frameworks. The present paper evaluates the case for IT in India. It begins with stating, almost from first principles, the objectives of monetary policy in India. I argue that inflation control cannot be an exclusive concern of monetary policy in a country such as India with a substantial poverty problem. The rationales for IT is then spelt out as are some nuances of the practical implementation of IT. 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. Further, the volatility of exchange rate and output movements in transition countries adopting IT has been higher than in developed market economies. The paper then discusses India’s experience with using rules-based policy measures (nominal targets) and elaborates on the reasons (as espoused in the extant literature) why India is not ready for IT. It is further shown that even if the Reserve Bank of India wanted to, it could not pursue IT since the short-term interest rate (the principal policy tool used to affect inflation in countries working with IT) does not have significant effects on the rate of inflation. The paper concludes by listing monetary policy options for India at the current time.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The Australian National University, Australia South Asia Research Centre in its series ASARC Working Papers with number 2005-04.
Date of creation: 2005
Date of revision:
Contact details of provider:
Postal: Crawford Building, Lennox Crossing, Building #132, Canberra ACT 0200
Phone: +61 2 6125 4705
Fax: +61 2 6125 5448
Web page: https://crawford.anu.edu.au/acde/asarc/
More information through EDIRC
Other versions of this item:
- Raghbendra Jha, 2008. "Inflation targeting in India: issues and prospects," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 259-270.
- Raghbendra Jha, 2005. "Inflation Targeting In India: Issues And Prospects," CAMA Working Papers 2005-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- NEP-ALL-2005-12-20 (All new papers)
- NEP-CBA-2005-12-20 (Central Banking)
- NEP-CWA-2005-12-20 (Central & Western Asia)
- NEP-MAC-2005-12-20 (Macroeconomics)
- NEP-MON-2005-12-20 (Monetary Economics)
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.:
- Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
- Arminio Fraga & Ilan Goldfajn & André Minella, 2003.
"Inflation Targeting in Emerging Market Economies,"
Working Papers Series
76, Central Bank of Brazil, Research Department.
- Ben S. Bernanke & Frederic S. Mishkin, 1997.
"Inflation Targeting: A New Framework for Monetary Policy?,"
Journal of Economic Perspectives,
American Economic Association, vol. 11(2), pages 97-116, Spring.
- 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.
- 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.
- Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 99/119, International Monetary Fund.
- Balakrishnan, Pulapre, 1991. "Industrial price behaviour in India : An 'error-correction' model," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 309-326, November.
- 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.
- 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.
- Lars E.O. Svensson, 1998.
"Inflation Targeting as a Monetary Policy Rule,"
NBER Working Papers
6790, National Bureau of Economic Research, Inc.
- Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
- Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
- Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
- Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
- Niamh Sheridan & Laurence M. Ball, 2003.
"Does Inflation Targeting Matter?,"
IMF Working Papers
03/129, International Monetary Fund.
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
- Luis Jácome & Francisco Vázquez, 2005.
"Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean,"
- Luis Ignacio JÃ¡come & Francisco F. VÃ¡zquez, 2005. "Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean," IMF Working Papers 05/75, International Monetary Fund.
- Robert J. Barro & David B. Gordon, 1983.
"A Positive Theory of Monetary Policy in a Natural-Rate Model,"
NBER Working Papers
0807, National Bureau of Economic Research, Inc.
- 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.
- Charles Bean, 2003.
"Asset prices, financial imbalances and monetary policy: are inflation targets enough?,"
BIS Working Papers
140, Bank for International Settlements.
- Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
- 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.
- 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.
- Dollar, David & Kraay, Aart, 2002.
" Growth Is Good for the Poor,"
Journal of Economic Growth,
Springer, vol. 7(3), pages 195-225, September.
- Raghbendra Jha & Anurag Sharma, 2004. "Structural Breaks, Unit Roots, and Cointegration: A Further Test of the Sustainability of the Indian Fiscal Deficit," Public Finance Review, , vol. 32(2), pages 196-219, March.
- M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
- Inoue, Takeshi & Hamori, Shigeyuki, 2009.
"What Explains Real and Nominal Exchange Rate Fluctuations? Evidence from SVAR Analysis for India,"
IDE Discussion Papers
216, Institute of Developing Economies, Japan External Trade Organization(JETRO).
- Takeshi Inoue & Shigeyuki Hamori, 2009. "What Explains Real and Nominal Exchange Rate Fluctuations?: Evidence from SVAR Analysis for India," Economics Bulletin, AccessEcon, vol. 29(4), pages 2803-2815.
- Syed Kumail Abbas Rizvi & Bushra Naqvi & Sayyid Salman Rizavi, 2012. "What Does Pakistan Have to Join the Inflation Targeters’ Club—a Royal Flush or a Seven-Deuce Offsuit?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(2), pages 35-62, July-Dec.
- Epstein, Gerald, 2009. "Rethinking monetary and financial policy : practical suggestions for monitoring financial stability while generating employment and poverty reduction," ILO Working Papers 434439, International Labour Organization.
- Gerald Epstein, 2009. "Rethinking Monetary and Financial Policy: Practical suggestions for monitoring financial stability while generating employment and poverty reduction," Published Studies ilo_epstein11_09, Political Economy Research Institute, University of Massachusetts at Amherst.
- Muneesh Kapur & Michael Debabrata Patra, 2012. "Alternative Monetary Policy Rules for India," IMF Working Papers 12/118, International Monetary Fund.
- Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, vol. 29(4), pages 1053-1063.
- Muneesh Kapur & Michael Debabrata Patra, 2010. "A Monetary Policy Model Without Money for India," IMF Working Papers 10/183, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.