Assessing central bank commitment to inflation targeting: Evidence from financial market expectations in India

Vaishali Garga (), Aeimit Lakdawala and Rajeswari Sengupta
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Vaishali Garga: Federal Reserve Bank of Boston

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

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 perceives a larger response to inflation in the monetary policy reaction function since 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: 39 pages
Date: 2022-10
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (2)

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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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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2022-017

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