Eleventh Global Studies Conference

Abstract

Inflation targeting is a monetary policy strategy used by central banks for maintaining inflation at a certain level or within a specific range, by publicly declaring the inflation target. Using methods such as interest rate and liquidity changes, the central bank is expected to guide inflation to the targeted level or range. Such a policy makes the central bank focus on a single variable and imposes a penalty if the target is not adhered to. This policy was initially adopted by New Zealand in 1990. Thereafter, many countries have adopted inflation targeting as a part of monetary policy during the 1990s. However, it has been argued that inflation targeting may not be efficacious for emerging economies as they are prone to sudden economic shocks and inefficient transmission mechanisms. There has been a constant debate on the advantages and disadvantages of inflation targeting, and whether the same can be implemented in emerging economies like India. In this light, this paper explores the suitability of inflation targeting for India by examining the underlying conditions required for its effective implementation as a monetary policy strategy and assessing whether such conditions are fulfilled by the Indian economy. I explain the concept of inflation targeting and examine the conditions required for its effective implementation and provide review of literature on inflation targeting. I highlight the efficacy of inflation targeting in both developed and emerging economies and introduce the Indian scenario with respect to suitability and effectiveness of inflation targeting. I conclude and provide policy recommendations.