Measuring trend inflation in India

Harendra Behera and Michael Debabrata Patra

Journal of Asian Economics, 2022, vol. 80, issue C

Abstract: Central to monetary policy is the concept of trend inflation to which actual inflation outcomes are expected to converge after short run fluctuations die out. Accordingly, the inflation target needs to be fixed in alignment with trend inflation to avoid unhinging inflation expectations and flattening the aggregate supply curve or imparting a deflationary bias to the economy. Results from a regime switching model applied to a hybrid New Keynesian Philips curve suggest a steady decline in trend inflation since 2014 to 4.1–4.3 per cent just before COVID-19 struck. This points to maintaining the inflation target at 4 per cent for India.

Keywords: Trend inflation; Inflation target; Regime-switching model; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C22 E31 E42 E52 E58 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:80:y:2022:i:c:s1049007822000331

DOI: 10.1016/j.asieco.2022.101474

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