Thursday, June 05, 2008

Comment on inflation targeting for India

Tony Cavoli and Ramkishen Rajan have a interesting comment on the question of inflation targeting for India. Towards the end, they have a particularly interesting paragraph:

This leads us to a broader issue as to whether an inflation targeting arrangement errs on the side of policy rigidity and discipline or discretion and flexibility? While the exact balance between flexibility and rigidity will no doubt vary between countries (and possibly over time within a country), broad rules of thumb suggest: (a) the less credible the central bank (i.e. poorer its inflation-fighting track record); (b) the less its technical ability; and (c) the lower its political independence, the more advisable it is to pre-commit to a strict or hard inflation target (i.e. preference of a rule over discretion).

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