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Modelling the Relationship between Whole Sale Price and Consumer Price Indices: Cointegration and Causality Analysis for India

  • Aviral Kumar Tiwari

    (Aviral Kumar Tiwari is Research scholar and Faculty of Applied Economics, Faculty of Management, ICFAI University, Tripura. E-mail:

  • Muhammad Shahbaz

    (Muhammad Shahbaz is with the Department of Management Sciences, COMSATS Institute of Information Technology, Lahore, Pakistan. E-mail:

The study attempts to analyze the static and dynamic causality between producers’ prices measured by wholesale price index (WPI) and consumers’ prices measured by consumers’ 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 Juselius’ (1990) maximum likelihood approach over the time period of 1950–2009. We found bidirectional causality between producers’ and consumers’ prices in Indian economy. Variance decomposition (VD) forecast analysis reveals that in India, producers’ prices lead consumers’ prices. This implies that WPI is determined by market forces and also a leading indicator of consumers’ 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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Article provided by International Management Institute in its journal Global Business Review.

Volume (Year): 14 (2013)
Issue (Month): 3 (September)
Pages: 397-411

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Handle: RePEc:sae:globus:v:14:y:2013:i:3:p:397-411
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  1. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
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  11. Muhammad Shahbaz & Abu N. M. Wahid & Adnan Haider, 2010. "Empirical Psychology Between Wholesale Price And Consumer Price Indices: The Case Of Pakistan," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(03), pages 537-551.
  12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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