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Causality and error correction in Markov chain: Inflation in India revisited

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  • N. Vijayamohanan Pillai

    () (Centre for Development Studies)

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    Abstract

    The present paper proposes certain statistical tests, both conceptually simple and computationally easy, for analysing state-specific prima facie probabilistic causality and error correction mechanism in the context of a Markov chain of time series data arranged in a contingency table of present versus previous states. It thus shows that error correction necessarily follows causality (that is temporal dependence) or vice versa, suggesting apparently that the two represent the same aspect! The result is applied to an analysis of inflation in India during the last three decades separately and also together based on the monthly general price level (WPI - all commodities) and 23 constituent groups/items, as well as on the three consumer price index (CPI) numbers.

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    Bibliographic Info

    Paper provided by Centre for Development Studies, Trivendrum, India in its series Centre for Development Studies, Trivendrum Working Papers with number 366.

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    Length: 70 pages
    Date of creation: Dec 2004
    Date of revision:
    Handle: RePEc:ind:cdswpp:366

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    Related research

    Keywords: Markov chain; Steady state probability; India; Inflation; Return period;

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    1. Tugrul Temel & Aysit Tansel & Peter J. Albersen, 1999. "Convergence and Spatial Patterns in Labor Productivity: Nonparametric Estimations for Turkey," Working Papers 9931, Economic Research Forum, revised Oct 1999.
    2. McQueen, Grant & Thorley, Steven, 1991. " Are Stock Returns Predictable? A Test Using Markov Chains," Journal of Finance, American Finance Association, vol. 46(1), pages 239-63, March.
    3. McMillen, Daniel P. & McDonald, John F., 1991. "A Markov Chain model of zoning change," Journal of Urban Economics, Elsevier, vol. 30(2), pages 257-270, September.
    4. Krenz, Ronald D., 1964. "Projection of Farm Numbers for North Dakota With Markov Chains," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 3.
    5. Don Webber, 2001. "Convergence of labour's factor reward between regions of the EU," Applied Economics Letters, Taylor and Francis Journals, vol. 8(5), pages 355-357.
    6. Andras Brody, 2000. "The Monetary Multiplier," Economic Systems Research, Taylor and Francis Journals, vol. 12(2), pages 215-219.
    7. Paul R. Masson, 2000. "Exchange Rate Regime Transitions," IMF Working Papers 00/134, International Monetary Fund.
    8. Duan, Jin-Chuan & Simonato, Jean-Guy, 2001. "American option pricing under GARCH by a Markov chain approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1689-1718, November.
    9. Tsiang, S C, 1978. "The Diffusion of Reserves and the Money Supply Multiplier," Economic Journal, Royal Economic Society, vol. 88(350), pages 269-84, June.
    10. Paul Cheshire, 2000. "Endogenous Processes in European Regional Growth: Convergence and Policy," Growth and Change, Gatton College of Business and Economics, University of Kentucky, vol. 31(4), pages 455-479.
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