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Modelling Inflation in India: A Critique of the Structuralist Approach

Author

Listed:
  • Naveen Srinivasan

    (Indira Gandhi Institute of Development Research)

  • Vidya Mahambare

    (CRISIL Centre for Economic Research)

  • M. Ramachandran

    (Institute for Social and Economic Change)

Abstract

We estimate an augmented Phillips curve to examine the effects of supply shocks on inflation in India. Our results suggest that supply shocks only have a transitory effect on both headline and core measures of inflation. The evidence is robust to a variety of re-specifications and core inflation measures. The potential explanation for this is that monetary policy has not provided the basis for a sustained change in the inflation process by accommodating supply shocks i.e., expanding money supply in response to negative supply shocks. Thus, monetary authorities have implicitly focused on a core measure of inflation by discounting price movements that are expected to be reversed in the short-run. In short, what is crucial in inflation determination is not supply shocks per se but how policymakers respond to these shocks.

Suggested Citation

  • Naveen Srinivasan & Vidya Mahambare & M. Ramachandran, 2006. "Modelling Inflation in India: A Critique of the Structuralist Approach," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 4(2), pages 45-58, July.
    • Handle: RePEc:spr:jqecon:v:4:y:2006:i:2:d:10.1007_bf03546447
    DOI: 10.1007/BF03546447
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    Cited by:

    1. Behera, Harendra & Wahi, Garima & Kapur, Muneesh, 2018. "Phillips curve relationship in an emerging economy: Evidence from India," Economic Analysis and Policy, Elsevier, vol. 59(C), pages 116-126.
    2. Pulapre Balakrishnan & M. Parameswaran, 2021. "Modelling Inflation in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(3), pages 555-581, September.
    3. Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2015. "Price Rigidity, Inflation and the Distribution of Relative Price Changes," South Asian Journal of Macroeconomics and Public Finance, , vol. 4(2), pages 258-287, December.
    4. Pulapre Balakrishnan & M Parameswaran, 2019. "Modeling the Dynamics of Inflation in India," Working Papers 16, Ashoka University, Department of Economics.
    5. Bhavesh Salunkhe & Anuradha Patnaik, 2019. "Inflation Dynamics and Monetary Policy in India: A New Keynesian Phillips Curve Perspective," South Asian Journal of Macroeconomics and Public Finance, , vol. 8(2), pages 144-179, December.
    6. Ball, Laurence & Chari, Anusha & Mishra, Prachi, 2016. "Understanding Inflation in India," India Policy Forum, National Council of Applied Economic Research, vol. 12(1), pages 1-45.
    7. Pulapre Balakrishnan & M. Parameswaran, 2019. "Modeling the Dynamics of Inflation in India," Working Papers 1023, Ashoka University, Department of Economics.
    8. Chattopadhyay, Siddhartha & Sahu, Sohini & Jha, Saakshi, 2016. "Estimation of Unobserved Inflation Expectations in India using State-Space Model," MPRA Paper 72710, University Library of Munich, Germany.
    9. Mazhar, Ummad & Jafri, Juvaria, 2014. "Does an informal sector reduce the economic dividends of political stability? Empirical evidence," MPRA Paper 60764, University Library of Munich, Germany.

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