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Dynamics of inflation in India - a P-Star approach

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  • D. M. Nachane
  • R. Lakshmi

Abstract

P-Star models have become increasingly popular in recent years in developed countries. However data constraints have limited their applicability to the LDCs. In this paper, such a model is attempted for India using both annual and quarterly data for the period 1955-1995. It is found that velocity in India is trend stationary and using cointegration techniques it is then possible to develop a model to gauge inflationary pressures in the economy. The model is well calibrated to data, and in out-of-sample forecasts, it significantly outperforms a seasonal ARMA benchmark model. The velocity gap version of the model is particularly successful.

Suggested Citation

  • D. M. Nachane & R. Lakshmi, 2002. "Dynamics of inflation in India - a P-Star approach," Applied Economics, Taylor & Francis Journals, vol. 34(1), pages 101-110.
  • Handle: RePEc:taf:applec:v:34:y:2002:i:1:p:101-110
    DOI: 10.1080/00036840010020385
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    References listed on IDEAS

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    1. Jeffrey J. Hallman & Richard D. Porter & David H. Small, 1989. "M2 per unit of potential GNP as an anchor for the price level," Staff Studies 157, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Laurence Ball & Anusha Chari & Prachi Mishra, 2016. "Understanding Inflation in India," NBER Working Papers 22948, National Bureau of Economic Research, Inc.
    2. Paul, Biru Paksha, 2009. "In search of the Phillips curve for India," Journal of Asian Economics, Elsevier, vol. 20(4), pages 479-488, September.
    3. Reza Anglingkusumo, 2005. "Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis," Tinbergen Institute Discussion Papers 05-054/4, Tinbergen Institute.
    4. Pablo García S. & Rodrigo Valdés P., 2003. "Money and Inflation in an Inflation-Tageting Regime," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(1), pages 21-47, April.
    5. N. Kundan Kishor, 2012. "Modeling Inflation In India: The Role Of Money," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 57(04), pages 1-19.
    6. Pablo García S. & Rodrigo Valdés P, 2003. "Dinero e Inflación en el Marco de Metas de Inflación," Working Papers Central Bank of Chile 198, Central Bank of Chile.
    7. Holtemöller, Oliver & Mallick, Sushanta, 2015. "Global Food Prices and Business Cycle Dynamics in an Emerging Market Economy," IWH Discussion Papers 15/2015, Halle Institute for Economic Research (IWH).
    8. 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.
    9. Holtemöller, Oliver & Mallick, Sushanta, 2016. "Global food prices and monetary policy in an emerging market economy: The case of India," Journal of Asian Economics, Elsevier, vol. 46(C), pages 56-70.
    10. Sunil Paul & Sartaj Rasool Rather & M. Ramachandran, 2015. "Money and Inflation: Evidence from P-Star Model," Working Papers 2015-115, Madras School of Economics,Chennai,India.
    11. Melecky, Martin, 2008. "An alternative framework for foreign exchange risk management of sovereign debt," Policy Research Working Paper Series 4458, The World Bank.

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