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T. Cavoli
The exchange rate and optimal monetary policy rules in open and developing economies: some simple analytics
G. Bird, R.S. Rajan
Does devaluation lead to economic recovery or economic contraction? Examining the analytical issues with reference to Thailand
T. Cavoli, R.S. Rajan
Still searching for the middle ground: Asian exchange rate regimes a decade since the 1997‐98 crisis”, in
L. Ball
Policy rules for open economies
T. Cavoli, R.S. Rajan
Inflation targeting arrangements in Asia and elsewhere: exploring the role of the exchange rate
N. Batini, D. Laxton
Under what conditions can inflation targeting be adopted? The experience of emerging markets
T. Cavoli, R.S. Rajan
Extent of exchange rate flexibility in India
Purpose – The purpose of this paper is to explore whether India is a suitable candidate for an inflation targeting regime. It begins by placing India's monetary policy actions in a broader context by discussing whether the Reserve Bank of India (RBI) should shift from its current policy of heavily managed exchange rates to one involving greater currency flexibility. If the latter is chosen, the selection of inflation targeting would appear an appropriate one. Design/methodology/approach – This paper has analytical, empirical and policy dimensions. Given the recent history of exchange rate centered policy in India, a discussion of the role of the exchange rate is needed. This is presented by the use of an analytical model where we examine how inflation targeting might work with the exchange rate. Then the decision rule from the model (a monetary policy rule (MPR)) is adapted for empirical testing and is estimated to investigate whether an MPR that follows inflation targeting can work for India. Findings – There is some evidence to suggest that the RBI follows an MPR quite inadvertently. The MPR (interest rates) tends to react to current inflation, but there is no evidence that it reacts to forecasts of inflation. Additionally, interest rates do not react at all to the exchange rate. Originality/value – The RBI's operating policy framework and whether it should adopt an inflation targeting arrangement is a highly topical issue that has attracted a great deal of attention in policy discussions in India. Very few papers broach this topic systematically and combine the analytical and empirical considerations.
Indian Growth and Development Review – Emerald Publishing
Published: Sep 26, 2008
Keywords: Exchange rates; India; Inflation; Monetary policy
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