Dynamics of inflation in India: does the new inflation bias hypothesis provide an explanation?

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

Macroeconomics and Finance in Emerging Market Economies, 2008, vol. 1, issue 2, 199-212

Abstract: In this paper we estimate the Reserve Bank of India's (RBI) policy response to supply shocks. In particular, we exploit an important strand of the recent literature (the new inflation bias hypothesis) to understand why the two frequently cited measures of inflation in India have persistently diverged in recent years. Specifically, it is argued that the difference in coverage and weighting pattern between the indices interacting with policies pursued by the RBI to control its preferred inflation measure WPI turned out to be inappropriate with respect to stabilizing expected CPI-IW inflation. This in turn provides an explanation for the persistent divergence between the two measures of inflation.

Keywords: supply shocks; monetary policy; inflation divergence (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/17520840802252308

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