The Growth slowdown and the working of inflation targeting in India

Ashima Goyal

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

Abstract: The paper presents a variety of indicators to show that demand constrained output during the period of growth slowdown 2011-17. It also draws on research to show the macroeconomic structure of the economy is such that a policy induced demand contraction affects output more than it affects inflation. In this context it evaluates the application and working of inflation targeting. The framework agreed to was flexible inflation targeting but it was too narrowly and strictly implemented initially, although there are signs of moderation in 2018. There was too much emphasis on a weak aggregate demand channel to reduce inflation. Since inflation forecasts were biased upwards the more effective expectations anchoring channel of inflation targeting was under-utilized. Space available due to positive commodity shocks was not made use of so that the negative output gap further widened, even as potential output itself fell. The output sacrifice imposed was therefore higher than necessary. Finally, possible mechanisms to ensure IT is implemented flexibly as required in the Indian context are discussed.

Keywords: Inflation targeting; monetary policy committee; commodity price shocks; output sacrifice (search for similar items in EconPapers)
JEL-codes: E31 E52 F43 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2018-02
New Economics Papers: this item is included in nep-knm and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Growth Slowdown and the Working of Inflation Targeting in India (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2018-007

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