Author: Manhar Singh

Publisher:

Published: 2023

Total Pages: 0

ISBN-13:

The recent advent of the era of Inflation Targeting in India's monetary policy is symbolic of a rule based approach to monetary policy implemented by both advanced economies and emerging market economies. However, whether this renewed, seminal and discrete, monetary policy arrangement proves to be inimical to India's economic growth considering structural factors depends, critically, on the stability and dynamism of the relationship surrounding money, output and prices. A monetary policy approach driven by the need to target inflation makes this relationship all the more pertinent and consequential to India's macroeconomic health. For this reason, the targeting of the the CPI becoming the predominant objective of RBI's monetary policy makes an empirical estimate of the relationship, since the post liberalization period, a subject of serious pursuit. Hence, this dissertation tries to uncover the nexus that prevails among Broad Money, Consumer Price Index (Industrial workers), and Index of Industrial Production. Readily available empirical, and theoretical, insights on the systematic connection amongst money, output and prices will enable the monetary authorities to effectively maneuver the approach to monetary policy in a manner that can steer the economy on a stable path. To this effect, a number of evidence was found in this research analysis. Firstly, the long-run relationship between money, output and prices is seemingly entrenched and stable. Secondly, using broad money as a potential policy tool for controlling inflation is the conventional theoretical mechanism. However, in India's scenario, the real production given by Index of Industrial Production emerges as a critical component in controlling inflation, both in the short-run and long-run. Thirdly, the occurrence of broad money supply shocks and IIP shocks adversely affects the performance of the CPI contemporaneously. Thus, there is a need to be watchful for any potential shock affecting broad money supply and real production. Moreover, the broad money supply shock adversely impacts the IIP contemporaneously and in the short-run as well. Fourthly, and importantly, he broad money ii supply is exogenous but not the IIP and CPI. In essence, the presence of real business cycle theory where real shocks where real production is determining money supply and money demand cannot be refuted. CPI, which is being targeted, is overwhelmingly exogenous. In other words, other structural forces may be at play in determining the evolution of inflation. Essentially, it highlights that although money and real production may be important but not as much as other structural factors, the identification of which can throw a more persuasive policy guide.