Title: THE TRINITY OF INTEREST RATE, EXCHANGE RATE, AND
INFLATION: THE CASE FOR INFLATION TARGETING IN INDIA
Authors: Swapnil Bhardwaj
and Prof. Alpana Kateja
and Prof. Alpana Kateja2 1Senior Research Fellow, Department of Economics, University of Rajasthan,
Jawahar Lal Nehru Marg, Jaipur, Rajasthan 302004 2Professor, department of Economics, University of Rajasthan,
Jawahar Lal Nehru Marg, Jaipur, Rajasthan 302004
MLA 8 Bhardwaj, Swapnil, and Alpana Kateja. "THE TRINITY OF INTEREST RATE, EXCHANGE RATE, AND INFLATION: THE CASE FOR INFLATION TARGETING IN INDIA." Int. j. of Social Science and Economic Research, vol. 3, no. 1, Jan. 2018, pp. 181-189, ijsser.org/more2018.php?id=13. Accessed 2018.
APA Bhardwaj, S., & Kateja, A. (2018, January). THE TRINITY OF INTEREST RATE, EXCHANGE RATE, AND INFLATION: THE CASE FOR INFLATION TARGETING IN INDIA. Int. j. of Social Science and Economic Research, 3(1), 181-189. Retrieved from ijsser.org/more2018.php?id=13
Chicago Bhardwaj, Swapnil, and Alpana Kateja. "THE TRINITY OF INTEREST RATE, EXCHANGE RATE, AND INFLATION: THE CASE FOR INFLATION TARGETING IN INDIA." Int. j. of Social Science and Economic Research 3, no. 1 (January 2018), 181-189. Accessed , 2018. ijsser.org/more2018.php?id=13.
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Abstract: The paper attempts to estimate the interest rate, exchange rate and inflation nexus in the wake of
Inflation Targeting (IT) in India. IT is a flexible monetary framework used to tame inflation and
maintain price stability. Initially adopted by industrial countries, IT delivered robust results not
only it helped in maintaining price stability but also anchored people's future inflation
expectations and hence reduced inflation persistence. Motivated by the performance of IT regime
in developed countries, developing nations became enthusiastic about it and followed suit. The
economists all around share the common view that developing nations before implementing IT
as a monetary arrangement should initiate economic and financial reforms to meet certain
fundamental conditions imperative for IT's success. The existing empirical literature provides
adequate evidence on the fulfillment of pre-condition of fiscal discipline in economies
implementing IT, high external debt leads to currency depreciation when interest rates are
increased to curtail rising inflation, this further leads to increase in inflation, contradicting the
purpose of IT. The data of Three month Treasury bill rate as the rate of interest, real exchange
rate and Consumer Price Index (CPI) inflation for twenty years (1995-2015) is considered. The
study employs Autoregressive Distributed Lag (ARDL) model to evaluate the short run and long
run relationship between the variables. The results show the existence of significant and positive
short run relationship between real interest rate (RIR) and real exchange rate (RER). The short
run relationship between real interest rate, real exchange rate, and CPI inflation is inverse and
significant; the most interesting revelation is that when exchange rate depreciates inflation
reduces. In both the cases, the long run relationship between the variables is inconclusive and
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