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Is India ready for flexible inflation-targeting?

Author

Listed:
  • 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.

Suggested Citation

  • Abhijit Sen Gupta & Rajeswari Sengupta, 2014. "Is India ready for flexible inflation-targeting?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2014-019, Indira Gandhi Institute of Development Research, Mumbai, India.
  • Handle: RePEc:ind:igiwpp:2014-019
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2014-019.pdf
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    2. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2013. "Management of Capital Flows in India: 1990-2011," MPRA Paper 46217, University Library of Munich, Germany.
    3. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    4. Janak Raj & Khundrakpam J K & Dipika Das, 2011. "An Empirical Analysis of Monetary and Fiscal Policy Interaction in India," Working Papers id:4504, eSocialSciences.
    5. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
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    Cited by:

    1. Charan Singh, 2015. "Inflation Targeting India: Select Issues," Working Papers id:7002, eSocialSciences.
    2. Charan Singh, 2015. "Inflation Targeting in India: Select Issues," Working Papers id:7131, eSocialSciences.
    3. repec:spr:jsecdv:v:19:y:2017:i:1:d:10.1007_s40847-017-0042-2 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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