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A cointegration and error correction approach to the determinants of inflation in India

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  • I, Sahadudheen

Abstract

No doubt that the persistent rise in the price levels of commodities and services adversely affects the economic performance. The goal of each and every Government is to maintain low and relatively stable levels of inflation. Creeping or mild inflation can be viewed as having favorable impacts on the economy; on the other hand zero inflation is harmful to other sectors in the economy. The right level of inflation, is somewhere in the middle. The study analyzed the major determinants of inflation in India extracting 54 time series quarterly observations. The study employed Johansen-juselius cointegration methodology to test for the existence of a long run relationship between the variables. The cointegrating regression so far considers only the long-run property of the model, and does not deal with the short-run dynamics explicitly. For this, the error correction from the long run determinants of inflation is then used as a dynamic model to estimate the short run determinants of inflation. The study concluded that the GDP and broad money have a positive effect on the inflation in long run. On the other hand, interest rate and exchange rate has a negative effect. The income coefficient is 0.37 and showing significant, implying that in India, a one percent increase in income while others keep constant contributes 0.37% increase in inflation. Similarly the money coefficient is 0.047 and showing significant, implying that in India, one percent increase in money supply leads to a 5% increase in price level.

Suggested Citation

  • I, Sahadudheen, 2012. "A cointegration and error correction approach to the determinants of inflation in India," MPRA Paper 65561, University Library of Munich, Germany, revised 2012.
    • Handle: RePEc:pra:mprapa:65561
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    References listed on IDEAS

    as
    1. Gary G. Moser, 1995. "The Main Determinants of Inflation in Nigeria," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 270-289, June.
    2. Mrs. O. Liu & Mr. Olumuyiwa S Adedeji, 2000. "Determinants of Inflation in the Islamic Republic of Iran: A Macroeconomic Analysis," IMF Working Papers 2000/127, International Monetary Fund.
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    Cited by:

    1. Furrukh Bashir, Farzana Yousaf, Huda Aslam, 2016. "Determinants of Inflation in Pakistan: Demand and Supply Side Analysis," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 1(1), pages 1-15, March.
    2. Mohammad Mahabub Alam, 2018. "The Determinants of CPI Inflation in Bangladesh, 1980-2016," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 6(4), pages 441-461, December.
    3. Chimere Okechukwu Iheonu & Godfrey Ikechukwu Ihedimma & Samuel Nzube Eze, 2017. "An Autoregressive and Distributed Lag Model Approach to Inflation in Nigeria," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 3(1), pages 73-80, March.
    4. repec:gei:jnlfer:v:1:y:2016:i:1:p: is not listed on IDEAS
    5. Nair, Manju S, 2014. "Inflation Dynamics in India: An Analysis," MPRA Paper 57110, University Library of Munich, Germany.
    6. Suwareh Darbo & Amandine Nakumuryango, 2018. "Working Paper 305 - Inflation Dynamics In Post-Secession Sudan," Working Paper Series 2432, African Development Bank.
    7. Kamal, Khnd. Md. Mostafa, 2014. "Impact of Imported Intermediate Goods on Inflation Dynamics: Evidence from India," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 37(04), pages 53-63, December.

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    More about this item

    Keywords

    Wholesale price index; GDP; India; unit root; cointegration; Error correction;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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