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Do actions match words? Reassessing the Taylor rule in an emerging-market context

Author

Listed:
  • Vaishali Garga

    (Federal Reserve Bank of Boston)

  • Benjamin Gryzb

    (Federal Reserve Bank of Boston)

  • Rajeswari Sengupata

    (Indira Gandhi Institute of Development Research)

Abstract

We examine whether India's adoption of inflation targeting in 2015 aligned central bank communication with policy actions---a key determinant of credibility in emerging markets. Text analysis reveals the Reserve Bank of India's (RBI) communication shifted toward emphasizing inflation stabilization. Yet standard Taylor rules show no increase in responsiveness to realized inflation. This misalignment disappears when we estimate forward-looking reaction functions using the RBI's internal forecasts. The post-2015 response to expected inflation is strong and significant. Our findings show that conventional backward-looking rules can mischaracterize monetary policy conduct in emerging markets where policy responds to forecasts rather than realized outcomes.

Suggested Citation

  • Vaishali Garga & Benjamin Gryzb & Rajeswari Sengupata, 2026. "Do actions match words? Reassessing the Taylor rule in an emerging-market context," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2026-003, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2026-003
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    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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