Modelling Inflation in India

Pulapre Balakrishnan () and M. Parameswaran ()
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Pulapre Balakrishnan: Ashoka University
M. Parameswaran: Centre for Development Studies

Journal of Quantitative Economics, 2021, vol. 19, issue 3, No 7, 555-581

Abstract: Abstract The Reserve Bank of India pursues inflation targeting, which is based on the premise that inflation is related to the ‘output gap’, defined as the deviation of output from its natural level. We present an alternative model of inflation derived from structuralist macroeconomics, the highlight of which is an agricultural sector prone to fluctuating output. A distinctive feature of the model is that inflation is related to the relative price of agricultural goods, in addition to other determining variables. We then subject both the models to econometric testing that involved alternative measures of inflation, sample periods and data frequencies. The output-gap model is rejected while the structuralist model is statistically validated in the tests. This evidence points strongly to the need to take agricultural prices into account when designing anti-inflationary policy in India.

Keywords: Inflation in India; New Keynesian Phillips Curve; Structuralist macroeconomics (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s40953-021-00238-y

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