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Efficacy of monetary policy in controlling inflation in India in the post reform period: a threshold co-integration approach

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  • Mohammad Asif
  • Rana Afreen

Abstract

This study attempts to investigate the relationship between inflation, call money rate, output gap, capital flows, seigniorage, fiscal deficit and supply shock in India after the reforms in the framework of Lucas' theory of price. In this study, CPI is used to represent inflation in India. CMR is used as a proxy for monetary policy instrument. Output gap and amount of rainfall are used to capture demand side and supply side factors. Capital flows represents external sector. The result suggests that ARDL bounds test confirms a long run relationship between inflation and its determining variables. Threshold co-integration tests such as Gregory-Hansen and Hatemi-J (2008) confirmed co-integration among the variables incorporating one and two structural breaks, respectively. The result indicated that monetary factors along with fiscal factors are responsible for inflationary situation in the country.

Suggested Citation

  • Mohammad Asif & Rana Afreen, 2023. "Efficacy of monetary policy in controlling inflation in India in the post reform period: a threshold co-integration approach," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 17(3), pages 389-406.
    • Handle: RePEc:ids:ijepee:v:17:y:2023:i:3:p:389-406
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