Assessing Central Bank Commitment to Inflation Targeting: Evidence from Financial Market Expectations in India

Vaishali Garga, Aeimit K. Lakdawala and Rajeswari Sengupta

No 22-19, Working Papers from Federal Reserve Bank of Boston

Abstract: We propose a novel framework to gauge the credibility of central banks’ commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India’s adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation targeting. Both approaches indicate that the market perceived a larger response to inflation in the monetary policy reaction function following the adoption of inflation targeting. This evidence suggests that the market viewed the shift to inflation targeting as a credible commitment by the Reserve Bank of India.

Keywords: macroeconomic forecasts; financial markets; credibility; inflation targeting; inflation expectations (search for similar items in EconPapers)
JEL-codes: E44 E47 E52 E58 (search for similar items in EconPapers)
Pages: 37
Date: 2022-10-01
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (1)

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Working Paper: Assessing central bank commitment to inflation targeting: Evidence from financial market expectations in India (2022)
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DOI: 10.29412/res.wp.2022.19

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