Modelling the Relationship between Whole Sale Price and Consumer Price Indices: Cointegration and Causality Analysis for India
The study attempts to analyze the static and dynamic causality between producersâ€™ prices measured by wholesale price index (WPI) and consumersâ€™ prices measured by consumersâ€™ price index (CPI) in case of India. In doing so, we have applied the autoregressive distributed lag (ARDL) bounds testing approach to co-integration and robustness of the ARDL approach which is examined by Johansen and Juseliusâ€™ (1990) maximum likelihood approach over the time period of 1950â€“2009. We found bidirectional causality between producersâ€™ and consumersâ€™ prices in Indian economy. Variance decomposition (VD) forecast analysis reveals that in India, producersâ€™ prices lead consumersâ€™ prices. This implies that WPI is determined by market forces and also a leading indicator of consumersâ€™ prices and inflation. This gives an indication to the Indian policy analysts to control for factors affecting WPI in order to have control on CPI since CPI is used for indexation purposes for many wage and salary earners including government employees and hence it will be helpful in cutting down the excess government expenditure.
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