Modeling Inflation in India: The Role of Money

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Modeling Inflation in India: The Role of Money

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Kishor, N. Kundan

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N Kundan Kishor

Abstract

This paper studies the role of the real money gap- the deviation of real money balance from its long-run equilibrium level- for predicting inflation in India. Using quarterly data on manufacturing inflation from 1982 to 2007, we find that the real money gap is a significant predictor of inflation in India. Our results show that this variable is a better predictor of future inflation at quarterly horizon than the deviation of broad money growth from its target for the whole sample period. We also document a break in the overall predictability of inflation in the last quarter of 1995. We find that except for the real money gap, the forecasting power of other predictors under study has declined considerably after 1995.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16098.

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Date of creation: Jul 2009
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Handle: RePEc:pra:mprapa:16098

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-07-11 (All new papers)
NEP-CWA-2009-07-11 (Central & Western Asia)
NEP-MAC-2009-07-11 (Macroeconomics)
NEP-MON-2009-07-11 (Monetary Economics)

References listed on IDEAS
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