Modelling Inflation in India: A Critique of the Structuralist Approach

Naveen Srinivasan, Vidya Mahambare () and M Ramachandran ()

Journal of Quantitative Economics, 2006, vol. 4, issue 2, No 5, 45-58

Abstract: 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.

Keywords: Supply shock; inflation; Phillips curve; monetary policy; E31; E58 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/BF03546447

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