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

38 Pages Posted: 23 Mar 2017

See all articles by Jaromír Beneš

Jaromír Beneš

International Monetary Fund (IMF)

Kevin Clinton

Government of Canada - Bank of Canada

asish thomas george

Government of India - Reserve Bank of India

Joice John

Government of India - Reserve Bank of India

Ondra Kamenik

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Pratik Mitra

Government of India - Reserve Bank of India

G.V. Nadhanael

Government of India - Reserve Bank of India

Hou Wang

International Monetary Fund (IMF)

Fan Zhang

International Monetary Fund (IMF)

Date Written: February 2017

Abstract

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.

Keywords: Asia and Pacific, Disinflation, India, Inflation targeting, Forecasting models, Monetary policy, Price stabilization, Central banks and their policies, inflation targeting; Reserve Bank of India; inflation episodes in India; forecasting models; monetary policy models; model calibration; monetary policy rules; monetary policy simulations, Reserve Bank of India, inflation episodes in India, monetary policy models, model calibration, monetary policy rules, monetary policy simulations, Model Evaluation and Testing, Forecasting and Other Model Applications, Forecasting and Simulation, Monetary Policy (Targets, Instruments, and Effects), Studies of Particular Policy Episodes

JEL Classification: C52, C53, E12, E31, E42, E47, E52, E58, E65

Suggested Citation

Beneš, Jaromír and Clinton, Kevin and george, asish thomas and John, Joice and Kamenik, Ondra and Laxton, Douglas and Mitra, Pratik and Nadhanael, G.V. and Wang, Hou and Zhang, Fan, Inflation-Forecast Targeting for India: An Outline of the Analytical Framework (February 2017). IMF Working Paper No. 17/32, Available at SSRN: https://ssrn.com/abstract=2938331

Jaromír Beneš (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kevin Clinton

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
613-782-8766 (Phone)
613-782 7508 (Fax)

Asish thomas George

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

Joice John

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

Ondra Kamenik

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Pratik Mitra

Government of India - Reserve Bank of India ( email )

Monetary Policy Department, COB
RBI, FORT
MUMBAI, MAHARASHTRA 400001
India

G.V. Nadhanael

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

Hou Wang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Fan Zhang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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