Should Emerging Economies Like India Adopt Inflation Targeting Arrangements?
Tony Cavoli and Ramkishen S. Rajan Despite decades of academic research, all we are left with is the rather unsatisfying conclusions that when it comes to the choice of appropriate exchange rate regime, all that can really be said is that there exists a broad spectrum of choices. It is not a black-or-white issue; shades of grey abound. All that can be said with any certainty is that in the absence of strong capital controls, currency intervention ought not be framed as a specific target for the exchange rate. Such targets inevitably tempt speculators by offering them the infamous one-way option. Thus, exchange rate and monetary policy strategies must involve a “fairly high” element of flexibility rather than a single-minded defense of a particular rate. One way of introducing greater exchange rate flexibility is for a country to adopt an open economy inflation targeting arrangement, something that has been advocated strongly by the IMF and many other observers buoyed by its apparent su
