ارزیابی هدفگذاری نرخ تورم به عنوان یک هدف سیاست پولی برای هند

This study formulates a small open economy model for India with exchange rate as a prominent channel of monetary policy. The model is estimated using the Instrumental Variable-Generalized Methods of Moments (IV-GMM) estimator and evaluated through simulations. This study compares different cases of domestic and CPI inflation targeting, strict and flexible inflation targeting, and simple Taylor type rules. The analysis highlights the unsuitability of simple Taylor-type monetary rules in stabilizing the Indian economy and suggests that discretionary optimization works better in stabilizing this economy. There seems to be a trade-off between output gap stabilization and exchange rate stabilization in flexible domestic inflation targeting and CPI inflation targeting respectively. However, flexible domestic inflation targeting seems a better alternative from an overall macro stabilization perspective in India where financial markets are still not sufficiently integrated to ensure quick transmission of interest rate impulses and existence of rigidities in the economy.

Inflation targeting has emerged as a powerful and effective monetary policy regime since the early 1990s. It has been adopted by a number of industrial countries starting with New Zealand in 1990, Canada in February 1991, Israel in December 1991, the United Kingdom in 1992, Sweden and Finland in 1993 and Australia and Spain in 1994. Many of the empirical studies show that an inflation targeting regime has been successful in significantly reducing inflation in these countries. Bernanke et al. (1999), for example, found that inflation remained lower after inflation targeting than would have been the case if forecasted by using Vector Auto-Regressions (VARs) estimated with the data from the period before inflation targeting started. Inflation targeting also helped to maintain price stability once it was achieved. Inspired by the success of inflation targeting in industrialized economies, many Emerging Market Economies (EMEs) also adopted an inflation-targeting approach to monetary policy, including Chile in 1991, Brazil in 1999, Czech Republic in 1997, Poland in 1998 and Hungary in 2001. Inflation targeting is currently practiced by a group of advanced economies and several medium to small sized EMEs. The applicability of this regime to a large, growing, developing economy like India is still a researchable area. There has been growing interest in analyzing the applicability and suitability of inflation targeting as a monetary policy regime for India, primarily because the current multiple indicator monetary policy approach2 of the Reserve Bank of India (RBI) seems to have lost its relevance and does not appear to work effectively.3 Many studies in the literature have attempted to analyze India's preparedness for inflation targeting. Indeed. several studies have examined financial sector reforms as the essential pre-condition for adoption of inflation targeting, and analyzed the preparedness of India for inflation targeting from that perspective (see, Jha, 2008 and Kannan, 1999). Following Kannan's (1999) suggestion that implementation of inflation targeting in India should wait until financial sector reforms have been completed, Singh (2006) argued that the first phase of financial sector reforms is complete and macroeconomic performance in terms of level of inflation and interest rates is satisfactory and stable suggesting that conditions are favorable in India for the adoption of inflation targeting. Singh advocated addressing a few issues, namely, use of both fiscal and monetary instruments to control inflation, publication of full-fledged inflation reports, and establishing an inflation committee to bring transparency in its operation before an actual inflation targeting framework could be adopted in India. Khatkhate (2006) asserted that inflation targeting might be a good policy framework for India as the RBI always has to be on alert to maintain its credibility and authority in controlling inflation, even though the sources of inflation in India are often non-monetary.4 She suggested that in operational terms India ought to target headline inflation. Mishra and Mishra (2009) analyzed the preconditions for inflation targeting in India, namely, the independence of monetary policy from fiscal, external, structural and financial concerns, and assessing its suitability as a monetary policy framework for India. They found that the Indian economy satisfies the preconditions for inflation targeting. Extending the analysis of Mishra and Mishra (2009), this study attempts to answer the question of the probable consequences of shifting to an inflation targeting framework of monetary policy, and how different shocks will affect the economy under this framework by using a general linear model of the economy with quadratic loss function to be minimized by the central bank for India. Inflation targeting is conducted in conjunction with a Monetary Policy Rule (MPR). MPR is part of the overall monetary policy of the central bank or monetary authority, and specifies how the instrument of monetary policy is to be changed given the characteristics of the macro economy and the policy objective of the central bank. This study compares different cases of strict and flexible domestic and CPI (Consumer Price Index) inflation targeting (Optimal MPR) with simple Taylor type rules (simple MPR) to examine the most suitable 5 inflation targeting framework for India. Modeling inflation targeting as the announcement and assignment of a relatively specific loss function to be minimized by the central bank, this study suggests that simple Taylor type rules are inadequate in stabilizing the economy, and that optimal rules work better. Further, though there seems to be a trade-off between output gap stabilization and exchange rate stabilization in flexible domestic inflation targeting and CPI inflation targeting respectively, flexible domestic inflation targeting appears to be a better policy option for India from an overall macro stabilization aspect. The organization of the rest of this paper is as follows: Section 2 presents a brief review of the models used in literature to examine the monetary policy rules; Section 3 outlines the structure of the theoretical model and the description of its main equations; 4 and 5 present empirical and simulation results respectively; and the final section presents the conclusions and policy implications of this study

Our small macro model of the Indian economy was built on the results from the VAR model proposed by Mishra and Mishra (2010) and based on literature on small open economy models. In our model the exchange rate has a prominent role to play in both the determination of the aggregate demand and supply equation of the economy. Our model specification is different from other models of open economies in that we assumed both the aggregate supply and demand equation to be affected by the lag of (change in) exchange rate rather than its contemporaneous value.24 Estimation results of aggregate supply justify the assumption of hybrid Phillips curve for India and suggest that backward dynamics (lag of inflation) are slightly more important than forward dynamics (expected inflation in the next period) to explain inflation outcomes in India. This further indicates the presence of rigidities25 in price setting behavior in the Indian economy resulting in short-run trade-off between inflation and output. We found that the supply curve in India was flatter compared to a mature small open economy and that there was an excess capacity in the economy. We also found that the interest rate elasticity of the aggregate demand is low. Within this framework, the properties of strict vs. flexible domestic and CPI inflation targeting were examined and compared with the Taylor rules (domestic and CPI Inflations). The analysis highlights the unsuitability of simple Taylor type monetary rules in stabilizing the economy and suggests that discretionary optimization works better. There appears to be a trade-off between output gap stabilization and real exchange rate stabilization under domestic and CPI inflation targeting respectively. Flexible domestic inflation targeting seems a better alternative from an overall macro stabilization perspective in the present scenario where financial markets are still not integrated enough to ensure quick transmission of interest rate impulses (as suggested by low sensitivity of demand to interest rate impulses) and existence of rigidities in the economy (as indicated by flat Phillips curve). There are two main limitations to the study that provide useful directions and scope for future research. One of the limitations relates to the formulation of the model, in that the model is a simple three equation model and foreign variables are not explicitly modeled. The model is linear with quadratic loss function and there are different sources which can induce non-linearity in the model (like non negative nominal interest rate or non linear Phillips curve). The other limitation of the study is the application of general empirical methodology. We note that the GMM method exploits only part of the information implied by the model, while the currently more popular likelihood methods (with the Kalman filter) and Bayesian estimation can use all the implications of the DSGE model. It would be very desirable to test the results of the model using the abovementioned alternative empirical approaches, and thus provides an interesting area for future research.