Effectiveness of Monetary Policy in Controlling Inflation

Abstract

The role of the monetary policy in any country is to achieve higher rate of growth with a stable inflation rate. These objectives become all the more important in an emerging economy such as India. Since 2009 the monetary authority has been giving higher preference to price control and so has increased the repo rate, or not reduced it, even after constant pressure from the government. Under the recommendation of the Chakraborty Committee since 1998-99, India has been following a multiple targeting approach where the only target or objective is not either price control or higher growth but multiple. However post US crisis, since 2010 it has been trying to target or control inflation. Every increase in the repo rate has been justified by the Governor of Reserve Bank of India as necessary to control uncontrollable inflation rate. But ideally, according to many theories and studies chasing inflation is not suitable for our country. In the light of all this, the present paper studies some important factors affecting inflation which can help us analyze the monetary policy response to inflation. The paper uses annual time series data to study the effectiveness of monetary policy in controlling inflation. Granger causality is also tested across inflation and the factors affecting it, in order to study influential factors and future policy actions. The results drawn are mixed in the multivariate linear regression model.