Inflation Targeting for India The Implications of Limited Asset Market Participation

Tara Iyer

No 110, NCAER Working Papers from National Council of Applied Economic Research

Abstract: This paper analyzes whether liquidity constraints matter for optimal monetary policy choices in an open economy. Asset market participation is limited as some agents lack financial capacity and behave in a hand-to-mouth fashion. I evaluate consumer welfare using a micro-founded welfare criterion derived through perturbation techniques, and find that the presence of liquidity constraints requires re-thinking conventional monetary policy design. Simple rules are ranked. While consumer price index (CPI) inflation targeting is appropriate in a fully Ricardian economy, a nominal exchange rate peg is shown to be least suboptimal when financial participation is low. The analysis is applied to the Indian context where monetary policy has recently been overhauled and a new CPI inflation targeting regime is being implemented.

Keywords: Open Economy Macroeconomics, General Aggregative Models: Keynes; Keynesian; Post-Keynesian, Optimal Monetary Policy, Limited Asset Market Participation (search for similar items in EconPapers)
JEL-codes: E12 E24 E52 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-07
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.ncaer.org/publication/inflation-target ... market-participation First version, 2015 (application/pdf)

Related works:
Working Paper: Inflation Targeting for India? The Implications of Limited Asset Market Participation (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nca:ncaerw:110

Access Statistics for this paper

More papers in NCAER Working Papers from National Council of Applied Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by B Ramesh ().