Inflation targeting in India
Abstract
This paper seeks to examine the effect of supply shocks on the goals of inflation targeting as a monetary policy strategy. A VAR model was employed using New Keynesian Phillips Curve (NKPC) to capture impulse responses of supply shocks on CPI inflation. The result suggests that the effect of shocks to fuel and oil on CPI is strong and but short-lived, while that of food and beverages is very strong and persistent. This could be detrimental for Inflation targeting as it would shoot up CPI inflation resulting in an increase in household inflation expectations and huge disinflationary cost to bring it down under target range. Some lessons are drawn from international experiences
to tackle supply shocks in time of crisis.
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