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Working Paper
Assessing Central Bank Commitment to Inflation Targeting: Evidence from Financial Market Expectations in India
We propose a novel framework to gauge the credibility of central banks’ commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India’s adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation ...
Working Paper
Do Actions Match Words? Reassessing the Taylor Rule in an Emerging-Market Context
Backward-looking Taylor rules, widely used to characterize central bank behavior, can misrepresent policy when central banks base decisions on forecasts. This mischaracterization affects the assessment of credibility, defined as alignment between a central bank’s words and actions. We examine this issue in the context of India’s adoption of flexible inflation targeting (FIT) in 2015. Text analysis shows that the Reserve Bank of India’s (RBI) communication became more inflation-focused and forward-looking after FIT adoption. Yet backward-looking Taylor rules show no robust increase in ...