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INFLATION TARGETING AND INTEREST RATE RULES
A Project Report by:
November 23, 2015
Group #3
Section E
November 23, 2015
Group #3
Section E
Kaustubh (PGP/19/264)
Kavya (PGP/19/265)
Kunal (PGP/19/266)
Madhu (PGP/19/267)
Madhur(PGP/19/268)

Contents

Introduction ------------------------------------------------------------------------------------------------------ 2
INFLATION TARGETING USING TAYLOR TYPE OF RULES -------------------------------------------- 2
RATIONALE FOR INFLATION TARGETING IN INDIA ----------------------------------------------------- 3
RATIONALE FOR NOMINAL GDP TARGETING IN INDIA ------------------------------------------------ 3

Introduction

Inflation is increased money supply, and often causing a sustained increase in the general price level of goods and services in an economy over a period of time by "Too much money chasing too few goods", as common acknowledge by modern people.
Inflation is of primarily four types – hyperinflation, disinflation, deflation and stagflation. Hyperinflation involves high growth of money supply i.e. in multiples of 100 and usually occurs when central bank is involved in excess money printing. Disinflation involves inflation that is growing at a decreasing rate. Deflation or negative inflation is decrease in money supply. Stagflation occurs when high growth in prices coincides with decelerated growth and unemployment.
Inflation is measured using indices namely, CPI (determined by current price of fixed basket of goods at retails shops), WPI (determined by current price of fixed basket of goods at wholesale shops) and GDP deflator( determined by growth in GDP in real terms). India has shifted from WPI to CPI.
Inflation either occurs due to increase in demand which causes both price level and output to increase (demand pull) or due to increase