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Analysis of the Effect of Currency Exchange Rate, Broad Money (M3) and Oil Prices on Inflation in India

Author

Listed:
  • Shikha Sharma

    (School of Liberal Education, Galgotias University, Greater Noida, India,)

  • Manju Dahiya

    (School of Liberal Education, Galgotias University, Greater Noida, India,)

Abstract

The main goal of any government is to keep the inflation rate low and generally constant. However, the economy is threatened by unbridled inflation. Therefore, it is important to understand the factors that affect inflation rates. Information on consumer price index, inflation rate, exchange rate and money supply has been collected from secondary data sources for India. Vector autocorrelation model (VECM) is used for data analysis. In addition, Lagrange multiplier test and Jarque-Bera test were used to determine whether the relationships of the variables are normal. The results showed a short run relationship between inflation and exchange rates. In the long run, there is a poor relationship between the two. Due to the absence of one of the criteria, the VECM cannot demonstrate long-run causality between the two circumstances. The results show that none of the lagged values of broad money are interesting.

Suggested Citation

  • Shikha Sharma & Manju Dahiya, 2023. "Analysis of the Effect of Currency Exchange Rate, Broad Money (M3) and Oil Prices on Inflation in India," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 13(3), pages 158-168, May.
    • Handle: RePEc:eco:journ1:2023-03-16
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    References listed on IDEAS

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    1. Ashra, Sunil & Chattopadhyay, Saumen & Chaudhuri, Kausik, 2004. "Deficit, money and price: the Indian experience," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 289-299, April.
    2. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198, National Bureau of Economic Research, Inc.
    3. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    4. Md Qaiser Alam & Md Shabbir Alam, 2016. "The Determinants of Inflation in India: The Bounds Test Analysis," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 6(2), pages 544-550.
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    Cited by:

    1. Ali Zeb & Niu Shuhai & Obaid Ullah, 2024. "Inflationary dynamics under fiscal and monetary asymmetries: a nonlinear investigation in Pakistan," SN Business & Economics, Springer, vol. 4(12), pages 1-30, December.
    2. Salah A. Alawadhi & Adedayo E. Longe, 2024. "Oil Price Fluctuation and their Impact on the Macroeconomic Variables: The Case of Kuwait," International Journal of Energy Economics and Policy, International Journal of Energy Economics and Policy, vol. 14(3), pages 375-386, May.
    3. Marwa Elsherif, 2024. "Modelling Inflation Dynamics and Global Oil Price Shocks in OAPEC Countries: TVP-VAR," International Journal of Energy Economics and Policy, International Journal of Energy Economics and Policy, vol. 14(3), pages 51-69, May.
    4. Haseen Ahmed & Rajbeer Kaur, 2026. "Dynamic Connectedness Among Oil Prices, Exchange Rate and Consumer Inflation: New Evidence from India," IIM Kozhikode Society & Management Review, , vol. 15(2), pages 224-233, July.

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    Keywords

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    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
    • F2 - International Economics - - International Factor Movements and International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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