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Monetary Policy Effect on Inflation and Growth

Published in 2019

Abstract:

This paper examines the evolution of the objectives of monetary policy and how after a detour it has returned to the control of inflation as it was under the Gold Standard (GS). But whereas it was geared to external conditions during the GS, it has moved full circle and should now be geared towards maintaining internal balance. India started experimenting with different frameworks for monetary policy once it became clear that monetisation of the budget deficit had a significant influence on the rate of inflation. It has finally settled on inflation targeting. Our preliminary findings from a panel of developing countries that have adopted inflation targeting shows that adoption of inflation targeting reduces inflation, raises growth rates and reduces external debt. However, IT has not always been successful in reducing inflation to the target range. Furthermore, before the oil price rise of 1973 these economies grew at considerably higher rates though this was accompanied by faster inflation. The lower inflation may be at the cost of slower growth.

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