Issues in the choice of a monetary regime for India
Date
Authors
Singh, Kanhaiya
McKibbin, Warwick
Journal Title
Journal ISSN
Volume Title
Publisher
Canberra, ACT: Economics Division, Research School of Asia and the Pacific, The Australian National University
Abstract
Economic liberalization and financial sector reforms in India commenced in 1990. An important issue currently facing India and the focus of a lively debate, is the question of the appropriate regime for conducting monetary policy in an economy undergoing structural reforms. To add to this important debate, this paper summarizes the state of the current policy debate on selecting a monetary regime for India and presents estimates of the impact of alternative monetary regimes in the face of a variety of shocks to the Indian economy. The impacts of shocks to aggregate demand, productivity growth and risk perceptions are considered under the three policy regimes of money targeting, inflation targeting and nominal income targeting. It is concluded that a monetary target performs worst among the three regimes while the results of income targeting are most encouraging. Inflation targeting only performs well for demand shocks but causes greater volatility in real output under both productivity shocks and risk reassessment shocks. As there is a general trend towards inflation targeting in industrialized economies, this particular results should give some caution to Indian monetary authorities in following the industrialized world in their choice of an inflation-targeting regime. The most likely shocks to face India in a period of structural reform are different to those facing industrialized economies and are less well handled under an inflation target regime compared to a nominal income-targeting regime.
Description
Keywords
India, monetary regime, money targeting, inflation targeting, nominal income targeting, MSG2 model, alternative monetary regimes, persistent demand, temporary demand
Citation
Collections
Source
Type
Working/Technical Paper
Book Title
Entity type
Access Statement
Open Access
License Rights
DOI
Restricted until
Downloads
File
Description