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The stability of the Phillips curve in India: Does the Lucas critique apply?

  • Mazumder, Sandeep

The overwhelming majority of the literature that has attempted to estimate a Phillips curve for India has found that the model does not fit the data, with the notable exception of Paul (2009). However, this paper argues that the Indian Phillips curve can be estimated using standard econometric techniques, as opposed to several special adjustments that are required in Paul (2009)’s work. Once we establish the existence of the Phillips curve in India, we examine whether the Lucas critique applies to the behavior of the model under different Reserve Bank of India (RBI) Governors. We find that there is little-to-no evidence for structural change in the model between successive RBI Governors. Hence the results demonstrate that the Phillips curve is alive and well in India, and that the Lucas critique does not apply empirically to Indian inflation–output data.

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File URL: http://www.sciencedirect.com/science/article/pii/S104900781100039X
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Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 22 (2011)
Issue (Month): 6 ()
Pages: 528-539

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Handle: RePEc:eee:asieco:v:22:y:2011:i:6:p:528-539
DOI: 10.1016/j.asieco.2011.05.002
Contact details of provider: Web page: http://www.elsevier.com/locate/asieco

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  1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  2. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," NBER Working Papers 8421, National Bureau of Economic Research, Inc.
  3. Ghani, Ejaz, 1991. "Rational expectations and price behavior : A study of India," Journal of Development Economics, Elsevier, vol. 36(2), pages 295-311, October.
  4. Blanchard, Olivier J, 1984. "The Lucas Critique and the Volcker Deflation," American Economic Review, American Economic Association, vol. 74(2), pages 211-15, May.
  5. Paul, Biru Paksha, 2009. "In search of the Phillips curve for India," Journal of Asian Economics, Elsevier, vol. 20(4), pages 479-488, September.
  6. Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 99/119, International Monetary Fund.
  7. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
  8. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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