The strategic implication of monetary control: An empirical investigation of the Indian economy

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Kumari, A. ; Kumar, V. ; Brady, M. ; O'Regan, N. (2013)

Emerging economies have struggled hard to keep inflation low at the same time as facilitating high economic growth. These economies always attempt to execute strategic policy framework to curb inflation which in-turn affect the growth rate. This paper attempts to provide an overview of a monetary policy measure known as ‘Inflation Targeting Framework’ to target inflation at a projected level by manipulating other macroeconomic variables. The focus of the paper is to study inflationary situation in a vast and diverse emerging economy—India. Some parts of India are very affluent while others lack the basic amenities. This study, therefore, explores the implications of a strategic framework that is dynamic and flexible in nature and can be implemented with ease. The study empirically investigates the relationship between inflation and major economic aggregates. The findings show that inflation is highly correlated with interest rates, money supply, and real effective exchange rates. Thus, these variables can be adjusted to target inflation at a projected level. The outcome of this paper also provides suggestions for the implementation of a phase-wise flexible strategic policy framework.
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