NO: WP-2022-017
AUTHOR: Vaishali Garga, Aeimit Lakdawala and Rajeswari Sengupta
TITLE: Assessing Central Bank Commitment to Inflation Targeting: Evidence From Financial Market Expectations in 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.
JEL Code: E44, E47, E52, E58
Weblink: http://www.igidr.ac.in/pdf/publication/WP-2022-017.pdf
