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Revisiting the Phillips curve for India and inflation forecasting

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  • Kapur, Muneesh

Abstract

This paper focuses on modeling and forecasting inflation in India using an augmented Phillips curve framework. Both demand and supply factors are seen as drivers of inflation. Demand conditions are found to have a stronger impact on non-food manufactured products (NFMP) inflation vis-a-vis headline wholesale price inflation; moreover, NFMP inflation is found to be more persistent than headline inflation. Both these findings support the use of NFMP inflation as a core measure of inflation. But, the impact of global non-fuel commodities on NFMP inflation is found to be substantial. Inflation in non-fuel commodities is seen as a more important driver of domestic inflation rather than fuel inflation. The exchange rate pass-through coefficient is found to be modest, but nonetheless sharp depreciation in a short period of time can add to inflationary pressures. The estimated equations show a satisfactory in sample as well as out-of-sample performance based on dynamic simulations. Nonetheless, forecasting challenges emanate from volatility in international oil and other commodity prices and domestic food supply dynamics.

Suggested Citation

  • Kapur, Muneesh, 2013. "Revisiting the Phillips curve for India and inflation forecasting," Journal of Asian Economics, Elsevier, vol. 25(C), pages 17-27.
  • Handle: RePEc:eee:asieco:v:25:y:2013:i:c:p:17-27
    DOI: 10.1016/j.asieco.2012.12.002
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    References listed on IDEAS

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    Cited by:

    1. Laurence Ball & Anusha Chari & Prachi Mishra, 2016. "Understanding Inflation in India," NBER Working Papers 22948, National Bureau of Economic Research, Inc.
    2. Harendra Behera & Garima Wahi & Muneesh Kapur, 2017. "Phillips Curve Relationship in India: Evidence from State-Level Analysis," Working Papers id:11973, eSocialSciences.
    3. Sunil Paul & Sartaj Rasool Rather & M. Ramachandran, 2015. "Money and Inflation: Evidence from P-Star Model," Working Papers 2015-115, Madras School of Economics,Chennai,India.

    More about this item

    Keywords

    Exchange rate pass-through; India; Inflation; Monetary policy; Phillips curve;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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