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Pre-conditions for Inflation Targeting in an Emerging Economy: The Case of India

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  • Ankita Mishra

    (RMIT University, Melbourne, VIC, Australia)

Abstract

This article looks at the preconditions that an emerging economy needs to fulfill, before it can adopt inflation targeting as a monetary policy regime. The study is conducted using the Indian economy as a case study. We conduct sector-wise analysis of the Indian economy to evaluate the independence of India’s monetary policy from fiscal, external, structural and financial perspectives. Dominance from any of these sectors may divert monetary policy from the objective of maintaining price stability in the economy. Our analysis suggests that among the four dominance issues, the issue of “structural dominance” is the most acute for India. Supply shocks, hitting the economy due to structural bottlenecks, pose a major threat to the independent conduct of monetary policy. This study concludes that inflation band targeting with a wide target range would be a feasible monetary policy option for India.

Suggested Citation

  • Ankita Mishra, 2013. "Pre-conditions for Inflation Targeting in an Emerging Economy: The Case of India," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 13(1), pages 89-108, April.
    • Handle: RePEc:wsi:gejxxx:v:13:y:2013:i:01:n:gej-2012-0014
    DOI: 10.1515/GEJ-2012-0014
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    References listed on IDEAS

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    1. Goyal, Ashima & Pujari, Ayan Kumar, 2005. "Identifying long run supply curve of India," MPRA Paper 24021, University Library of Munich, Germany.
    2. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Mohammed SAIFUL ISLAM & Mohammad Taslim UDDIN, 2011. "Inflation Targeting as the Monetary Policy Framework: Bangladesh Perspective," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 14(1), pages 106-119, June.
    2. Mishra, Ankita & Mishra, Vinod, 2012. "Inflation targeting in India: A comparison with the multiple indicator approach," Journal of Asian Economics, Elsevier, vol. 23(1), pages 86-98.
    3. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Lucas Kamau Njoroge & Sheila Kaminchia, 2012. "Feasibility of inflation targeting in an emerging market: evidence from Kenya," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(2), pages 146-159, May.
    4. Petreski, Marjan, 2013. "Inflation targeting at the crossroads: Evidence from post-communist economies during the crisis," MPRA Paper 47018, University Library of Munich, Germany.
    5. Moid U. AHMAD & Shamima NASRIN, 2017. "An analysis of the effect of monetary policy changes on macroeconomic factors," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(611), S), pages 303-318, Summer.
    6. Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, vol. 29(4), pages 1053-1063.

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    More about this item

    Keywords

    India; inflation targeting; monetary policy; fiscal dominance; VAR; GFVD;
    All these keywords.

    JEL classification:

    • 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
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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