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Modelling Inflation in India

Author

Listed:
  • Pulapre Balakrishnan

    (Ashoka University)

  • M. Parameswaran

    (Centre for Development Studies)

Abstract

The Reserve Bank of India pursues inflation targeting, which is based on the premise that inflation is related to the ‘output gap’, defined as the deviation of output from its natural level. We present an alternative model of inflation derived from structuralist macroeconomics, the highlight of which is an agricultural sector prone to fluctuating output. A distinctive feature of the model is that inflation is related to the relative price of agricultural goods, in addition to other determining variables. We then subject both the models to econometric testing that involved alternative measures of inflation, sample periods and data frequencies. The output-gap model is rejected while the structuralist model is statistically validated in the tests. This evidence points strongly to the need to take agricultural prices into account when designing anti-inflationary policy in India.

Suggested Citation

  • Pulapre Balakrishnan & M. Parameswaran, 2021. "Modelling Inflation in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(3), pages 555-581, September.
    • Handle: RePEc:spr:jqecon:v:19:y:2021:i:3:d:10.1007_s40953-021-00238-y
    DOI: 10.1007/s40953-021-00238-y
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    Cited by:

    1. Roy, Rudra Prosad & Sinha Roy, Saikat, 2022. "Commodity futures prices pass-through and monetary policy in India: Does asymmetry matter?," The Journal of Economic Asymmetries, Elsevier, vol. 25(C).
    2. Pulapre Balakrishnan & M. Parameswaran, 2022. "What lowered inflation in India: monetary policy or commodity prices?," Indian Economic Review, Springer, vol. 57(1), pages 97-111, June.

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    More about this item

    Keywords

    Inflation in India; New Keynesian Phillips Curve; Structuralist macroeconomics;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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