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Revisiting the Phillips curve for India and inflation forecasting

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  • Kapur, Muneesh
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    Abstract

    This paper focuses on modeling and forecasting inflation in India using an augmented Phillips curve framework. Both demand and supply factors are seen as drivers of inflation. Demand conditions are found to have a stronger impact on non-food manufactured products (NFMP) inflation vis-a-vis headline wholesale price inflation; moreover, NFMP inflation is found to be more persistent than headline inflation. Both these findings support the use of NFMP inflation as a core measure of inflation. But, the impact of global non-fuel commodities on NFMP inflation is found to be substantial. Inflation in non-fuel commodities is seen as a more important driver of domestic inflation rather than fuel inflation. The exchange rate pass-through coefficient is found to be modest, but nonetheless sharp depreciation in a short period of time can add to inflationary pressures. The estimated equations show a satisfactory in sample as well as out-of-sample performance based on dynamic simulations. Nonetheless, forecasting challenges emanate from volatility in international oil and other commodity prices and domestic food supply dynamics.

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    Bibliographic Info

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

    Volume (Year): 25 (2013)
    Issue (Month): C ()
    Pages: 17-27

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    Handle: RePEc:eee:asieco:v:25:y:2013:i:c:p:17-27

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

    Related research

    Keywords: Exchange rate pass-through; India; Inflation; Monetary policy; Phillips curve;

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    1. Jeff Fuhrer & Giovanni Olivei & Geoffrey M. B. Tootell, 2009. "Empirical estimates of changing inflation dynamics," Working Papers 09-4, Federal Reserve Bank of Boston.
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    13. Michael Debabrata Patra & Muneesh Kapur, 2012. "A monetary policy model for India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 5(1), pages 18-41, March.
    14. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
    15. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
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