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What is Responsible for India’s Sharp Disinflation?

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  • Sajjid Chinoy
  • Pankaj Kumar
  • Ms. Prachi Mishra

Abstract

We analyze the dramatic decline in India’s inflation over the last two years using an augmented Phillips Curve approach and quantify the role of different factors. Our results suggest that, contrary to popular perception, the direct role of lower oil prices in India’s disinflation was relatively modest given the limited pass-through into domestic prices. Instead, we find that inflation is a highly persistent process in India, reflecting very adaptive expectations and the backward looking nature of wage and support price-setting. As a consequence, we find that a moderation of expectations, both backward and forward, and a rationalization of Minimum Support Prices (MSPs), explain the bulk of the disinflation over the last two years.

Suggested Citation

  • Sajjid Chinoy & Pankaj Kumar & Ms. Prachi Mishra, 2016. "What is Responsible for India’s Sharp Disinflation?," IMF Working Papers 2016/166, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2016/166
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    References listed on IDEAS

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    1. Rahul Anand & Naresh Kumar & Mr. Volodymyr Tulin, 2016. "Understanding India’s Food Inflation: The Role of Demand and Supply Factors," IMF Working Papers 2016/002, International Monetary Fund.
    2. Rahul Anand & Ding Ding & Mr. Volodymyr Tulin, 2014. "Food Inflation in India: The Role for Monetary Policy," IMF Working Papers 2014/178, International Monetary Fund.
    3. Clemente, Jesus & Montanes, Antonio & Reyes, Marcelo, 1998. "Testing for a unit root in variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2), pages 175-182, May.
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    Cited by:

    1. Harendra Behera & Garima Wahi & Muneesh Kapur, 2017. "Phillips Curve Relationship in India: Evidence from State-Level Analysis," Working Papers id:11973, eSocialSciences.
    2. Nandi, Aurodeep, 2019. "Fiscal deficit targeting alongside flexible inflation targeting: India’s fiscal policy transmission," Journal of Asian Economics, Elsevier, vol. 63(C), pages 1-18.
    3. 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.

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