India’s Inflation Process Before and After Flexible Inflation Targeting

Patrick Blagrave and Weicheng Lian

No 2020/251, IMF Working Papers from International Monetary Fund

Abstract: We study the inflation process in India, focusing on the periods before and after the adoption of flexible inflation-forecast targeting (FIT) in India. Our analysis uses several approaches including standard Phillips curve estimation for headline and core inflation, an examination of the sensitivity of medium-term inflation expectations to inflation surprises, and the properties of convergence between headline and core inflation. Results indicate an important role for domestic factors in driving the inflation process, and there is evidence that expectations have become more anchored since 2015. This result could be attributable to FIT adoption, or to persistently low food prices which dominate the post-FIT-adoption period. The policy implications of these structural changes in the inflation process are investigated using a semi-structural model calibrated to the Indian economy.

Keywords: India; WP; inflation expectation; headline inflation processes; food price inflation; core-inflation process; core-inflation determinant; headline inflation forecast; Inflation targeting; Inflation; Food prices; Emerging and frontier financial markets; Import prices; Global (search for similar items in EconPapers)
Pages: 26
Date: 2020-11-13
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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