 Inflation targeting and the changing transmission mechanism of monetary policy in IndiaEconomic Modelling, 2025, vol. 151, issue C 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. Keywords: Inflation targeting; Monetary transmission mechanism; Price puzzle; Time-varying parameters (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001361 DOI: 10.1016/j.econmod.2025.107141 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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