Does Inflation Targeting Help Information Transmission?

Abstract

This paper studies the informational impact of inflation targeting on financial market volatility in an emerging market context by using a novel monetary policy regime-switching approach. We find that the changeover to inflation targeting in India did not result in a greater impact of monetary policy surprises on bond and equity market volatility. We rule out financial frictions as a factor driving our results. Our evidence-based textual analysis of central bank policy announcements shows an increased focus on inflation, but not on growth, possibly explaining why the equity market impact of monetary policy announcements remained weak even after inflation targeting.

Keywords: inflation targeting, central bank communication, monetary policy

JEL Classification: E44, E58