Speaker: Dr Shekhar Tomar, Indian School of Business, Hyderabad
Date & Hour: 09 October 2019, 4:15 pm
Venue: Seminar Hall 1
Title: Does Inflation Targeting help information transmission? Evidence from India
Abstract: This paper provides a novel evidence in favor of the informational properties of inflation targeting (IT) and document the attenuative effect of IT on financial market volatility. We evaluate the impact of the hard switch to IT by India in 2015 on the information transmitted to the markets through central bank policy announcements. We find systematic and significant differences in trading behavior in bond markets after the switch to IT, which corresponds to better information transmission. The trading activity around the policy decision becomes more predictable, reflected in bond yield volatility falling immediately prior to, and increasing immediately after, policy announcements post 2015. This corresponds to the case of markets expecting policy to be systematically and predictably informative about the future economic prospects and the central bank’s policy response. The time profile of equity returns volatility also experiences a similar change for financial institutions, but not for the broader stock market. A possible explanation is that, in the Indian context, the switch to inflation targeting has rendered monetary policy action more predictable about future inflation but not necessarily about the growth outlook and risks.