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Households' inflation expectations in India: Role of economic policy uncertainty and global financial uncertainty spill-over

Taniya Ghosh (), Sohini Sahu () and Siddhartha Chattopadhyay ()
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Sohini Sahu: Indian Institute of Technology, Kanpur

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Inflation expectations are an important marker for the conduct of monetary policy. Using a Bayesian structural VAR-X model that includes the inflation expectations of general public based on the Inflation Expectations Survey of Households (IESH), in a first of its kind of study using this dataset, we analyze the macroeconomic factors that determine inflation expectations in India with special focus on economic uncertainty. Besides the standard macroeconomic factors like real output, inflation rate and monetary policy, we also include economic policy uncertainty as a possible endogenous variable in our model that influences inflation expectations, while international financial volatility that has spill-over effects is an exogenous variable. Using non-recursive identification strategy, we find that economic policy uncertainty has considerable effects on households' expectations of inflation and in a longer horizon the international financial volatility also matters. Additionally, in presence of inflation expectations and economic policy uncertainty, we find that the monetary policy shock causes output and inflation to fall significantly; thereby solving the "price puzzle" that otherwise exists in the monetary transmission mechanism literature for India.

Keywords: BVAR; Inflation Expectations; Economic Policy Uncertainty; Price Puzzle (search for similar items in EconPapers)
JEL-codes: E41 E52 E58 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-05
New Economics Papers: this item is included in nep-mac and nep-mon
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