Inflation targeting and the changing transmission mechanism of monetary policy in India

Alex, Dony (2025) Inflation targeting and the changing transmission mechanism of monetary policy in India. Economic Modelling, 151: 107141. pp. 1-14. ISSN 0264-9993

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Abstract

We examine shifts in the conduct of monetary policy in India, before and after the adoption of inflation targeting (IT), while also accounting for the impact of COVID-19. Unlike existing studies that pre-date COVID-19, we employ a unified framework using a time-varying BVAR model with data spanning 1998 to 2024. We find that, prior to IT, contractionary monetary policy had a limited impact on inflation with presence of a price puzzle. In contrast, the IT period exhibits improved monetary policy transmission, with policy shocks exerting a stronger influence on inflation with the price puzzle disappearing, reflecting enhanced policy credibility. However, this effect weakens during the COVID-19 years. Interestingly, monetary policy had greater influence on the output gap and exchange rate in the pre-IT period, with diminished effects during IT and COVID-19 period. These findings underscore the effectiveness of inflation targeting in improving the transmission of monetary policy in India, though it shows limitations during COVID-19.

Item Type: Article
Keywords: Inflation targeting | Monetary transmission mechanism | Price puzzle | Time-varying parameters
Subjects: Social Sciences and humanities > Economics, Econometrics and Finance > Econometrics
JGU School/Centre: Jindal School of Liberal Arts & Humanities
Depositing User: Mr. Luckey Pathan
Date Deposited: 27 Jun 2025 14:55
Last Modified: 27 Jun 2025 14:55
Official URL: https://www.sciencedirect.com/science/article/pii/...
URI: https://pure.jgu.edu.in/id/eprint/9681

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