Impact of Inflation Targeting on Inflation-Growth Trade-off : Evidence From India

We ask whether the sensitivity of monetary policy shocks to inflation expectations, growth, and inflation changes as a result of adopting the inflation targeting regime in India. We use state-level variation in inflation and inflation expectations and bank-level variation in their propagation of monetary policy shocks for identification. We find that the sensitivity of growth to monetary policy shocks increases in response to inflation targeting as a result of changing real rates. Consequently, inflation also responds more to monetary policy shocks under the inflation-targeting regime. Inflation expectations, however, do not get anchored and remain as adaptive as before