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In search of the Phillips curve for India

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  • Paul, Biru Paksha
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    Abstract

    The economics literature suggests that the Phillips curve is nonexistent in India. This study finds that supply shocks, namely droughts and oil crises, and the liberalization-policy shock of the early 1990s are the main reasons for the absence of the Phillips curve in India. Once I account for these shocks by reconstructing the data of inflation and the output gap in crop year instead of fiscal year, and move to the industrial sector, the Phillips curve emerges in the conventional fashion. Thus, the short-run tradeoff between inflation and industrial output is still possible in India, as it is in other developed economies.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Asian Economics.

    Volume (Year): 20 (2009)
    Issue (Month): 4 (September)
    Pages: 479-488

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    Handle: RePEc:eee:asieco:v:20:y:2009:i:4:p:479-488

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    Web page: http://www.elsevier.com/locate/asieco

    Related research

    Keywords: Phillips curve Supply and policy shocks Inflation Output gap Indian economy;

    References

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    1. Scheibe, Jörg & Vines, David, 2005. "A Phillips Curve for China," CEPR Discussion Papers 4957, C.E.P.R. Discussion Papers.
    2. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers rdp1999-01, Reserve Bank of Australia.
    3. Rumler, Fabio, 2005. "Estimates of the open economy New Keynesian Phillips curve for euro area countries," Working Paper Series 0496, European Central Bank.
    4. Karl Whelan & Jeremy Rudd, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," Computing in Economics and Finance 2003 181, Society for Computational Economics.
    5. John H. Makin, 1982. "Anticipated Money, Inflation Uncertainty, and Real Economic Activity," NBER Working Papers 0760, National Bureau of Economic Research, Inc.
    6. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Ahluwalia, Isher J., 1979. "An analysis of price and output behavior in the Indian economy: 1951-1973," Journal of Development Economics, Elsevier, vol. 6(3), pages 363-390, August.
    8. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
    9. D. M. Nachane & R. Lakshmi, 2002. "Dynamics of inflation in India - a P-Star approach," Applied Economics, Taylor & Francis Journals, vol. 34(1), pages 101-110.
    10. Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
    11. Makin, John H, 1982. "Anticipated Money, Inflation Uncertainty and Real Economic Activity," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 126-34, February.
    12. Ramachandran, M., 2004. "Do broad money, output, and prices stand for a stable relationship in India?," Journal of Policy Modeling, Elsevier, vol. 26(8-9), pages 983-1001, December.
    13. Ravi Balakrishnan & J David Lopez-Salido, 2002. "Understanding UK inflation: the role of openness," Bank of England working papers 164, Bank of England.
    14. Ghani, Ejaz, 1991. "Rational expectations and price behavior : A study of India," Journal of Development Economics, Elsevier, vol. 36(2), pages 295-311, October.
    15. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
    16. Pami Dua & Anirvan Banerji, 2001. "An Indicator Approach to Business and Growth Rate Cycles: The Case of India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 36(1), pages 55-78, January.
    17. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
    18. Gordon, Robert J, 1977. "The Theory of Domestic Inflation," American Economic Review, American Economic Association, vol. 67(1), pages 128-34, February.
    19. Madhur, Srinivasa & Roy, Prannoy, 1986. "Price setting in Indian industry," Journal of Development Economics, Elsevier, vol. 20(2), pages 205-224, March.
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    Citations

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    Cited by:
    1. Dholakia, Ravindra H., . "Cost and Benefit of Disinflation Policy in India," IIMA Working Papers WP2014-02-08, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Karan Singh, B & Kanakaraj, A & Sridevi, T.O, 2010. "Revisiting the empirical existence of the Phillips Curve for India," MPRA Paper 31793, University Library of Munich, Germany.
    3. Tiwari, Aviral Kumar & Oros, Cornel & Albulescu, Claudiu Tiberiu, 2014. "Revisiting the inflation–output gap relationship for France using a wavelet transform approach," Economic Modelling, Elsevier, vol. 37(C), pages 464-475.
    4. Kapur, Muneesh, 2013. "Revisiting the Phillips curve for India and inflation forecasting," Journal of Asian Economics, Elsevier, vol. 25(C), pages 17-27.
    5. Jagadish Prasad Sahu, 2013. "Inflation dynamics in India: A hybrid New Keynesian Phillips Curve approach," Economics Bulletin, AccessEcon, vol. 33(4), pages 2634-2647.

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