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The Growth Slowdown and the Working of Inflation Targeting in India

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  • Ashima Goyal

Abstract

The paper presents a variety of indicators to show that demand constrained output during the period of growth slowdown 2011-17. It also draws on research to show the macroeconomic structure of the economy is such that a policy induced demand contraction affects output more than it affects inflation. In this context it evaluates the application and working of inflation targeting. The framework agreed to was flexible inflation targeting but it was too narrowly and strictly implemented initially, although there are signs of moderation in 2018. There was too much emphasis on a weak aggregate demand channel to reduce inflation. Since inflation forecasts were biased upwards the more effective expectations anchoring channel of inflation targeting was under-utilized. Space available due to positive commodity shocks was not made use of so that the negative output gap further widened, even as potential output itself fell. The output sacrifice imposed was therefore higher than necessary. Finally, possible mechanisms to ensure IT is implemented flexibly as required in the Indian context are discussed.

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  • Ashima Goyal, 2018. "The Growth Slowdown and the Working of Inflation Targeting in India," Working Papers id:12540, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:12540
    Note: Institutional Papers
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    References listed on IDEAS

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    1. Ministry of Finance, Government of India,, 2017. "Economic Survey 2016-17," OUP Catalogue, Oxford University Press, edition 2, number 9780199477661.
    2. Khundrakpam, Jeevan Kumar & Jain, Rajeev, 2012. "Monetary Policy Transmission in India: A Peep Inside the Black Box," MPRA Paper 50903, University Library of Munich, Germany.
    3. Goyal, Ashima & Arora, Sanchit, 2016. "Estimating the Indian natural interest rate: A semi-structural approach," Economic Modelling, Elsevier, vol. 58(C), pages 141-153.
    4. Ashima Goyal & Akhilesh Verma, 2018. "Slowdown in Bank Credit Growth: Aggregate Demand or Bank Non-performing Assets?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 12(3), pages 257-275, August.
    5. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Aug), pages 9-110.
    6. Goyal, Ashima & Kumar, Abhishek, 2018. "Active monetary policy and the slowdown: Evidence from DSGE based Indian aggregate demand and supply," The Journal of Economic Asymmetries, Elsevier, vol. 17(C), pages 21-40.
    7. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Satya Prasad Padhi, 2024. "Indian Experience of Managing Impossible Trinity, Growth and Possible Tradeoff Between FDI and FIIs: Nature of Capital Inflows Matter," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 16(1), pages 44-63, January.
    2. Ashima Goyal, 2018. "The Indian fiscal-monetary framework: Dominance or coordination?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-010, Indira Gandhi Institute of Development Research, Mumbai, India.

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    More about this item

    Keywords

    Inflation targeting; monetary policy committee; commodity price shocks; output sacrifice; indicators; growth slowdown; policy; inflation; moderation; channel of inflation; negative output gap; IT; mechanisms; India.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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