IMF Working Papers

Inflation-Forecast Targeting for India: An Outline of the Analytical Framework

By Jaromir Benes, Kevin Clinton, Asish George, Joice John, Ondrej Kamenik, Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Hou Wang, Fan Zhang

February 13, 2017

Download PDF

Preview Citation

Format: Chicago

Jaromir Benes, Kevin Clinton, Asish George, Joice John, Ondrej Kamenik, Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Hou Wang, and Fan Zhang. Inflation-Forecast Targeting for India: An Outline of the Analytical Framework, (USA: International Monetary Fund, 2017) accessed December 13, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

India formally adopted flexible inflation targeting (FIT) in June 2016 to place price stability, defined in terms of a target CPI inflation, as the primary objective of monetary policy. In this context, the paper draws on Indian macroeconomic developments since 2000 and the experience of other countries that adopted FIT to bring out insights on how credible policy with an emphasis on a strong nominal anchor can reduce the impact of supply shocks and improve macroeconomic stability. For illustrating the key issues given the unique structural characteristics of India and the policy options under an FIT framework, the paper describes an analytical framework using the core quarterly projection model (QPM). Simulations of the QPM are carried out to illustrate the monetary policy responses under different types of uncertainty and to bring out the importance of gaining credibility for improving monetary policy efficacy.

Subject: Central bank policy rate, Economic theory, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Supply shocks

Keywords: A number of monetary policy instrument, Asset price inflation, Central bank, Central bank policy rate, Exchange rate, Food inflation, Forecasting models, Global, Inflation, Inflation condition, Inflation episodes in India, Inflation expectation, Inflation glide path, Inflation outcome, Inflation process, Inflation spiral, Inflation targeting, Interest rate, Model calibration, Monetary policy, Monetary policy credibility, Monetary policy models, Monetary policy rules, Monetary policy simulations, Output gap, Output-inflation trade-off, Reserve Bank of India, Supply shocks, Transmission mechanism, WP

Publication Details

  • Pages:

    37

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/032

  • Stock No:

    WPIEA2017032

  • ISBN:

    9781475578690

  • ISSN:

    1018-5941