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Study of Inflation in India: A Cointegrated Vector Autoregression Approach

Author

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  • Anuradha Patnaik

    (S.F.S. College, Seminary Hills, Nagpur)

Abstract

The spate of persistent inflationary pressure experienced in the post liberalisation era in India throws light on the fact that the causes of inflation in India have undergone tectonic changes. The present study therefore aims at empirically identifying the determinants of inflation in India. In a Cointigrated Vector Autoregression (VAR) framework, the empirical estimation is carried out. The Error Correction Mechanism (ECM) of the cointegrated variables is also carried out. The Impulse Response Function (IRF) of the cointegrated VAR system shows that there is a lag in the response of inflation to the changes in the other variables in the VAR system. The Fixed Error Variance Decomposition (FEVD) shows that, the inflation in India is a mix of demand and supply side factors. The stabilization policies should therefore focus on both demand control as well as supply management. Also considering the lag in the impact of the explanatory variables the stabilization policies should become more pro-active.

Suggested Citation

  • Anuradha Patnaik, 2010. "Study of Inflation in India: A Cointegrated Vector Autoregression Approach," Journal of Quantitative Economics, The Indian Econometric Society, vol. 8(1), pages 118-129, January.
    • Handle: RePEc:jqe:jqenew:v:8:y:2010:i:1:p:118-129
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    File URL: http://www.jqe.co.in/journals/JQE_v8_n1_2010_p8.pdf
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    References listed on IDEAS

    as
    1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    2. Nachane, Dilip M., 2006. "Econometrics: Theoretical Foundations and Empirical Perspectives," OUP Catalogue, Oxford University Press, number 9780195647907.
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    Cited by:

    1. Biswajit Maitra & Tafajul Hossain, 2020. "Inflation in India: causes and anti-inflationary policy perception," International Journal of Economic Policy Studies, Springer, vol. 14(2), pages 363-387, August.
    2. Cindrella Shah & Nilesh Ghonasgi, 2016. "Determinants and Forecast of Price Level in India: a VAR Framework," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 14(1), pages 57-86, June.
    3. Biswajit Maitra, 2016. "Inflation Dynamics in India: Relative Role of Structural and Monetary Factors," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 14(2), pages 237-255, December.

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    More about this item

    Keywords

    Inflation; Money Supply ; Stabilasition Policy; Cointegrated Vector Autoregression; Error Correction Model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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