Inflation targeting group 7 section f_bc
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1) The document discusses topics related to inflation targeting including what it is, why it is controversial, cross-country experiences, how to implement it, and recommendations for India. 2) Inflation targeting is a monetary policy strategy used by central banks to maintain inflation at a specific target level or range through interest rate changes and other monetary actions. It aims to improve transparency but may prioritize inflation over other goals like growth. 3) Implementing inflation targeting requires conditions like central bank independence, developed financial markets, and a flexible exchange rate - conditions many emerging economies like India currently lack.
Inflation targeting group 7 section f_bc
- 1. Member’s Name Roll No. Akshat Kaushik 201601112 Baljeet Kaur 201600216 Debangana 201610312 Pratik Beriwala 201611308 Rishabh Gupta 201601219 Shashank Sharma 201601329 Submitted by:- Group-7/Sec F Submitted to:- Dr. Tulika Sharma Assistant Professor (Business Communication) – General Management & Chairperson – Grievance Redressal Committee (IMT-Hyderabad) Business Communication II 1
- 2. Topics of discussion on IT •What is inflation targeting? •Why IT is controversial? •Review of Literature. •Cross Country experiences •Inflation Target Measure •Why use inflation targeting? •How to Implement Inflation Targeting •IT in India •What the RBI to do if the inflation target is not met? •Determination and notification of Inflation Target •Conclusion and Recommendations •Biblography 2
- 3. What is inflation Inflation targeting is a monetary policy strategy used by central banks for maintaining inflation at a certain level or within a specific range. In general, central banks normally follow a policy of keeping inflation sufficiently low. However, in inflation targeting, there is a preset, publicly declared target. Using methods such as interest rate changes, the central bank and other monetary authorities are expected to guide inflation to a 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 although other countries, most notably Germany, had evolved something close to inflation targeting considerably earlier. 3
- 4. Why inflation targeting is controversial? A unique and at the same time a controversial feature inflation targeting is that the central bank should sideline all other objectives to ensure that the single goal of price stability is realized. This strategy makes the IT framework generally unacceptable in the developing world. This is because there are two problems while a developing country central bank adopt it. First, fighting inflation or price stability is one important objective of the general macroeconomic objective in fast growing developing economies. The equally important objective is achievement faster economic growth. Second one is that generally there is conflict or trade-off between the objective of price stability and economic growth. Another limitation of inflation targeting in countries like India, it neglects the real cause of inflation – agricultural supply shocks which can’t be solved by any monetary policy action. 4
- 5. Review of Literature Since its inception in 1990,(NewZeland) a considerable amount of literature on inflation targeting (IT) has evolved. While some of these provide the modeling details as to how to frame economic policies for IT, some others highlight the pros and cons of IT, while the rest debate which parameters are to be considered for IT. Major advocates of IT reason that one of the most important advantages of having IT is the accountability and transparency it brings to policy making. It helps in putting a quantitative target, and a fixed target horizon. The most damaging critique is that strictly following IT may give too much weight to inflation stabilization, prove detrimental to the stability of real economy or other possible monetary- policy objectives, hence credibility of the policy is questioned 5
- 6. Even in countries that follow inflation targeting, different countries define inflation targeting in different ways, and choose different indicators to target. Taking example: United Kingdom defines price stability by the Government's inflation target of 2% based on CPI announced each year in the annual Budget Statement.(2%,1992) New Zealand requires price stability be defined in a specific and public contract, negotiated between the Government and the Reserve Bank, called the Policy Targets Agreement .(2%,1990) In Canada, monetary policy is built around flexible exchange rate and inflation control target.(2%.1991) Thailand, on the other hand, targets core CPI exclusive of raw food and energy prices from headline inflation and the Monetary Policy Board (MPB) sets the inflation target in terms of quarterly average core inflation in the range of 1% to 4%. (1-4%,2000) Cross-country Experiences 6
- 7. Inflation target measure, type and horizon for select inflation targeting countries 7
- 8. Why Use Inflation Targeting? •Other monetary policy regimes gave no satisfactory results, such as: -fixed money growth rules -fixed exchange rates -crawling pegs -monetary conditions index rules Since their inception in the late 1980’s to date, no single country that adopted inflation targeting abandoned this regime. 8
- 9. How to Implement Inflation Targeting? Policy must be forward looking. The central bank sets rates so as to ensure that monetary conditions support the achievement of the inflation target. If inflation is expected to deviate from target, policy adjustments will be required. To be effective, policy must be clear, transparent, and have credibility. Multi-year targets are better than single-year ones. The ideal setting: targets are set by the government and implemented by an instrument-independent central bank, fiscal policy and wage policy are compatible with the target, and a floating exchange-rate regime is in place. 9
- 10. IT in India Monetary policy aims to target inflation over a horizon of 2 to 3 years. Therefore, to target inflation, it is necessary to have the capability to build an inflation forecast. India has yet to develop skills to forecast inflation over a range of 8 to 12 quarters. In countries which follow IT, sophisticated models are used to forecast inflation. Similarly, there is need to forecast output and its deviation from natural rate, implying forecasting of output gap. The other issue is the target inflation number which needs to be identified and quantified. Major price indices in India 10
- 11. What the RBI to do if the inflation target is not met? The new notification also prescribes the procedure to be followed by the RBI if the target is missed. “Where RBI fails to meet the inflation target, it shall set out a report to the Central Government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions 11
- 12. Determination and notification of Inflation Target In exercise of the powers conferred under the Reserve Bank of India Act, 1934, the Central Government, in consultation with RBI, has fixed the inflation target for the period beginning from August 5, 2016 and ending on the March 31, 2021, as under: Inflation Target: Four per cent Upper tolerance level: Six per cent Lower tolerance level: Two per cent While setting the above target, the government elaborated that inflation targeting in India will consider the growth dimensions also. “The key advantage of a range around a target is that it allows MPC to recognise the short run trade-offs between inflation and growth but enables it to pursue the inflation target in long run over the course of business cycle.” 12
- 13. Conclusions and Recommendations Various economists, both Indian and otherwise, have presented their views on inflation targeting. It is widely accepted that adoption of IT has helped most countries reduce their inflation rates successfully. Also, it helps increase the transparency and credibility of the central bank, thus allowing it to carry out its monetary policy with greater effectiveness. IT provides a nominal anchor, and helps to stabilize inflationary expectations in an uncertain future. Also, for some nations, exchange rate volatility has also declined as a result of IT implementation. But on the other hand, IT demands a number of pre-conditions for its successful implementation such as independence of central banks, well developed financial markets, flexible exchange rate, etc. Most emerging economies, including India, lack these conditions. Besides, RBI has objectives to take care of other parameters like economic growth, stable exchange rate and financial stability, and cannot restrict itself to the single objective of inflation. 13
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