Studies of the impact of inflation targeting have reached different conclusions depending, inter alia, on the countries, period and measures considered. We tabulate these studies in Appendix F. For emerging markets, there is evidence of lower inflation under IT, but results for inflation volatility are less consistent.<sup>33</sup> There is no clear consensus on the effects of IT on output growth—Brito and Bystedt (2010) find a significant negative effect on growth while other studies (Naqvi and Rizvi 2009, IMF 2011) find insignificant effects of IT on growth. Goncalves and Salles (2005) find that IT reduces output volatility, whereas Batini and Laxton (2006) find no such evidence.

We now compare the behavior of a range of economic and financial variables before and after the adoption of IT in India. We compare percentage changes and, where appropriate, volatility. Unless noted otherwise, the data are again quarterly and extend from 1997 through 2019. Our baseline specification is of the form: = α0 + α1IT + α2GFC + α3Post GFC + ε yy where, denotes the outcome variable; ITyytt tt, GFC and Post GFCtt denote inflation targeting dummy (Q3 tt tt 2016-Q4 2019), global financial crisis dummy (Q3 2008-Q1 2009) and a post global financial crisis tt tt tt tt yy dummy (Q2 2009-Q4 2019).<sup>34</sup> CPI headline, core and food inflation are all lower in the IT period, as shown in Table 8.<sup>35</sup> While CPI inflation increased after the global financial crisis, all measures of CPI inflation declined after the shift to inflation targeting. CPI headline inflation declined 4.9 percentage points relative to the post GFC average, and food inflation declined even more sharply, by 6.9 percentage points. WPI inflation also declined by 1.5 percent, though the change is not statistically significant.

**Table 8: Inflation is lower after inflation targeting**

||WPI<br>Inflation|CPI headline<br>inflation|CPI core<br>inflation|CPI food<br>inflation|
|---|---|---|---|---|
|Inflation Targeting|-1.53|-4.91<sup>***</sup>|-3.29<sup>***</sup>|-6.91<sup>***</sup>|
||(1.56)|(8.23)|(5.76)|(6.12)|
|Global Financial Crisis|2.65|3.98<sup>***</sup>|0.26|7.79<sup>***</sup>|
|Dummy|(1.46)|(7.14)|(0.61)|(7.81)|
|Post Global Financial|-0.66|3.14<sup>***</sup>|2.31<sup>***</sup>|4.20<sup>***</sup>|
|Crisis Dummy|(0.70)|(4.43)|(3.46)|(4.05)|
|Constant|5.13<sup>***</sup>|5.55<sup>***</sup>|5.87<sup>***</sup>|5.11<sup>***</sup>|
||(20.50)|(11.63)|(14.60)|(7.12)|
|Observations|91|91|91|91|
|Adjusted_R_<sup>2</sup>|0.06|0.29|0.17|0.27|

Note: Robust t statistics in parentheses; *, **, ***, indicate significance at 10, 5 and 1 percent.

> 33 Vega and Winkelried (2005), Batini and Laxton (2006), Li and Ye (2009), and IMF (2011) conclude that inflation volatility is significantly lower after IT, whereas Goncalves and Salles (2008) and Brito and Bysted (2010) find any difference to be insignificant.

> 34 We acknowledge that this framework cannot strictly establish any causal effects of inflation targeting, since we have not controlled for confounding factors and developments.

35 In an alternative specification, we control for output gap, and see an even sharper decline in headline inflation.

15