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Does Inflation Slow Long-Run Growth in India?

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  • Mr. Kamiar Mohaddes
  • Mr. Mehdi Raissi

Abstract

This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989–2013, and use the cross-sectionally augmented distributed lag (CSDL) approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation—to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5 percent. This suggest the need for the Reserve Bank of India to balance the short-term growthinflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation.

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  • Mr. Kamiar Mohaddes & Mr. Mehdi Raissi, 2014. "Does Inflation Slow Long-Run Growth in India?," IMF Working Papers 2014/222, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2014/222
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    More about this item

    Keywords

    WP; India; inflation; growth; threshold effects; cross-sectional heterogeneity; dependence; data from the CEIC database; panel ARDL approach; inflation threshold effect; CS-DL estimation strategy; growth rate; CPI-RL data; inflation-growth trade-off; CS-DL result; ARDL specification; anti-inflation effort; CS-DL estimate; Consumer price indexes; Production growth; Threshold analysis;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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