Interfuel Substitution and Inflation Dynamics in India

Sengupta Anirban, Apostolos Serletis and Xu Libo
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Sengupta Anirban: Department of Economics, Indian Institute of Management-Bodhgaya, Bodhgaya, Bihar 824234, India
Xu Libo: Department of Economics, Lakehead University, Thunder Bay, Ontario P7B 5E1, Canada

Studies in Nonlinear Dynamics & Econometrics, 2024, vol. 28, issue 3, 553-566

Abstract: This paper uses neoclassical microeconomic theory to investigate the demand for energy and interfuel substitution in India at the sectoral level. It makes full use of the relevant economic theory and econometrics and generates inference in terms of Allen and Morishima elasticities of substitution that are internally consistent with the data and nonlinear models used. The results indicate that the interfuel substitution elasticities are consistently below unity in the household and power sectors, revealing the limited ability to substitute between major energy commodities in these two sectors. However, significant substitution relationships are found in the industrial and transportation sectors, suggesting that energy price changes in these sectors will significantly shift the demand for energy and consumption. Based on measured elasticities of substitution, we also discuss implications of energy price shocks on inflation and inflation targeting strategies by the central bank.

Keywords: flexible functional forms; normalized quadratic; theoretical regularity (search for similar items in EconPapers)
JEL-codes: C2 D4 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/snde-2022-0083

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