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Inflation Targeting for India? The Implications of Limited Asset Market Participation

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  • Tara Iyer

Abstract

This paper considers the implications of an imperfect monetary transmission mechanism for optimal monetary policy choices in an open economy. The asset market channel is restricted in this paper as some agents lack financial capacity and cannot participate in asset markets. We find that while consumer price index (CPI) inflation targeting is appropriate upon a cost-push shock when all agents can borrow and save, there exists a case for stabilizing the nominal exchange rate when financial participation is low. The analysis is applied to the Indian context where monetary policy has recently been overhauled and a new CPI ininflation targeting regime is being implemented.

Suggested Citation

  • Tara Iyer, 2015. "Inflation Targeting for India? The Implications of Limited Asset Market Participation," Working Papers id:7100, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:7100
    Note: Institutional Papers
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    Cited by:

    1. Oskolkov, Aleksei, 2023. "Exchange rate policy and heterogeneity in small open economies," Journal of International Economics, Elsevier, vol. 142(C).
    2. de Ferra, Sergio & Mitman, Kurt & Romei, Federica, 2020. "Household heterogeneity and the transmission of foreign shocks," Journal of International Economics, Elsevier, vol. 124(C).

    More about this item

    Keywords

    Open Economy Macroeconomics; General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Optimal Monetary Policy; Limited Asset Market Participation;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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