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Does Inflation Slow Long-Run Growth in India?

Kamiar Mohaddes () and Mehdi Raissi

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989-?2013, and use the cross-sectionally augmented distributed lag (CS-DL) approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation? to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5 percent. This suggests the need for the Reserve Bank of India to balance the short-term growth-inflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation.

Keywords: India; inflation; growth; threshold effects; cross-sectional heterogeneity and dependence. (search for similar items in EconPapers)
JEL-codes: C23 E31 O40 (search for similar items in EconPapers)
Date: 2014-11-28
New Economics Papers: this item is included in nep-gro and nep-mac
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Citations: View citations in EconPapers (4) Track citations by RSS feed

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