Research

This study uses a Bayesian time-varying parameter with stochastic volatility (TVP-SV) approach to analyze the behavior of inflation persistence across monetary regimes spanning hundred and fifty years from 1870 to 2020. Using long-term macroeconomic data to estimate a Phillips curve for the UK and the US, we find evidence for large variations in inflation persistence across time. Further leveraging the time-varying estimates of inflation persistence and our measure of regime credibility, we show that credibility can play a crucial role in determining inflation dynamics in an economy. Empirical evidence for both countries indicates that a higher degree of regime credibility leads to lower inflation persistence. Providing narrative evidence to support our econometric findings, we conclude that credible conduct of monetary policy is crucial for achieving and sustaining price stability on a durable basis. 

This paper examines how the volatility of inflation expectations affects trade balance dynamics. Using survey forecasts for thirty economies over 1991–2019, I identify shocks to inflation expectations volatility from unanticipated changes in the size of inflation forecast surprises. Following a shock, the trade balance moves toward surplus for about two years and toward deficit afterward, while its volatility also increases. In countries that adopt inflation targeting, trade balance volatility declines, consistent with a role for monetary policy credibility. To explain these findings, I develop and calibrate a small open-economy New Keynesian model in which inflation expectations can shift independently of fundamentals and the policy rule. The model reproduces the response of the trade balance through policy rate and exchange rate dynamics. It also generates the increase in trade balance volatility, and that increase is far larger when the economy borrows abroad in its own currency. Overall, the results indicate that inflation expectations volatility can contribute to trade balance fluctuations, while monetary policy credibility helps dampen these effects.

The Federal Reserve Board adopted Flexible Inflation Targeting in 2012, replaced it with Flexible Average Inflation Targeting in 2020, and returned to Flexible Inflation Targeting in 2025. We develop and analyze two policy rules, Asymmetric Coefficient Inflation Targeting, and Asymmetric Target Inflation Targeting, that extend the Flexible Inflation Targeting rules to be more stimulative when inflation is below the FED’s 2 percent target and still be time consistent. We evaluate monetary policy using the linearized version of the Federal Reserve Board/United States model and analyze Flexible Inflation Targeting, shortfalls, and our proposed rules. Four versions of each rule, determined by non-inertial, inertial, Taylor or Balanced Approach, are evaluated. Economic performance is better with balanced approach rules than with Taylor rules, worse with shortfalls rules than with FIT rules, better with inertial rules than with non-inertial rules, and better with the Asymmetric Coefficient Inflation Targeting and Asymmetric Target Inflation Targeting rules than with Flexible Inflation Targeting rules.

This paper examines the role of central bank credibility in the effectiveness of Inflation Targeting (IT) in anchoring inflation expectations, drawing on both empirical evidence and theoretical modeling. The empirical analysis demonstrates that IT adoption leads to better-anchored inflation expectations, particularly in emerging-market economies, and that central bank credibility significantly amplifies this effect in these contexts. The results also reveal substantial heterogeneity across country groups and target types, underscoring the importance of institutional context. To further explore these dynamics, I employ a New Keynesian model with non-rational expectations and an imperfect-credibility Phillips curve. The model shows that enhanced credibility not only lowers inflation and nominal interest rates but also moderates the impact on the output gap, as well-anchored expectations help absorb inflationary shocks. Overall, the findings indicate that credibility is a fundamental driver of IT’s success, especially in emerging markets, and that strengthening credibility should be a key policy priority for achieving macroeconomic stability.

It is not to be doubted that the oil price shocks adversely impact the economy. Enough literature is present in support of this fact but, at the same time, it is equivalently important to determine the changing nature of this relationship. This paper studies the changing behavior of this relation from 1948-2018 and shows that the oil prices are no more as effective in explaining the changes in the output of the economy as it had been before the 1970s. Our results also show the extent to which oil intensity has reduced in effecting the output of the US economy along with explaining the short term and long term impacts of oil shocks. Through variance decomposition analysis, the paper explains the reason for this decline in oil importance in recent time. Various factors like changing technology and political and strategic implications are found to be a few of the many reasons behind this change. 

Many studies have been conducted to examine the existence of Phillips curve for India however; most of the studies have argued that the Phillips curve exists but only in the short run and that too after controlling for supply shocks. It is not only the past values of inflation that are crucial for determining inflation but the forward-looking inflation expectations play an equally important role. However, most of the studies conducted till now have only focused on the quantitative estimates of the inflation expectations. In this context, this paper attempts to estimate a different series of inflation expectations that have been generated by accounting qualitative estimates of expectations along with the quantitative figures. Empirical findings show evidence of the existence of the NKPC for India. The results also indicate a significant role of inflation expectations in affecting inflation, thus providing credibility to monetary policymaking.