Dynamics of inflation in India - a P-Star approach

D. M. Nachane and R. Lakshmi

Applied Economics, 2002, vol. 34, issue 1, 101-110

Abstract: P-Star models have become increasingly popular in recent years in developed countries. However data constraints have limited their applicability to the LDCs. In this paper, such a model is attempted for India using both annual and quarterly data for the period 1955-1995. It is found that velocity in India is trend stationary and using cointegration techniques it is then possible to develop a model to gauge inflationary pressures in the economy. The model is well calibrated to data, and in out-of-sample forecasts, it significantly outperforms a seasonal ARMA benchmark model. The velocity gap version of the model is particularly successful.

Date: 2002
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DOI: 10.1080/00036840010020385

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