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Inflation in India: Behavior of Major Components

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  • S. Gangadaran

    (Reserve Bank of India)

Abstract

Understanding the effect of monetary policy (change in interest rate) on several sub-components of inflation, as some of them are believed to be dominated by other than demand-side dynamics, is important to analyze the effectiveness of monetary policy. VAR models, which are widely used to study monetary policy impulse, suffer from degrees of freedom constraints and hence, studying the behavior of several sub-components of inflation for monetary policy innovation using a standard VAR model may not be feasible. Taking advantage of the FAVAR method, in this paper we have extracted the impulse response functions for several important sub-components of wholesale price (WPI) inflation. The results show that even though most of the sub-components of WPI inflation behave as expected, for protein items' inflation and primary non-food articles' inflation, supply-side constraints are not as over-bearing as commonly perceived.

Suggested Citation

  • S. Gangadaran, 2017. "Inflation in India: Behavior of Major Components," Working Papers wp18, South East Asian Central Banks (SEACEN) Research and Training Centre.
    • Handle: RePEc:sea:wpaper:wp18
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    File URL: https://www.seacen.org/publications/RePEc/702003-100411-PDF.pdf
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    References listed on IDEAS

    as
    1. Kapur, Muneesh & Behera, Harendra, 2012. "Monetary Transmission Mechanism in India: A Quarterly Model," MPRA Paper 70631, University Library of Munich, Germany.
    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. Fernald, John G. & Spiegel, Mark M. & Swanson, Eric T., 2014. "Monetary policy effectiveness in China: Evidence from a FAVAR model," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 83-103.
    4. Khundrakpam, Jeevan Kumar, 2011. "Credit Channel of Monetary Transmission in India - How Effective and Long is the Lag?," MPRA Paper 50899, University Library of Munich, Germany.
    5. Ms. Prachi Mishra & Mr. Peter J Montiel & Rajeswari Sengupta, 2016. "Monetary Transmission in Developing Countries: Evidence from India," IMF Working Papers 2016/167, International Monetary Fund.
    6. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    7. Bhatt, Vipul & Kishor, N. Kundan, 2015. "Are all movements in food and energy prices transitory? Evidence from India," Journal of Policy Modeling, Elsevier, vol. 37(1), pages 92-106.
    8. Khundrakpam, Jeevan Kumar & Jain, Rajeev, 2012. "Monetary Policy Transmission in India: A Peep Inside the Black Box," MPRA Paper 50903, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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