Nonlinear relationships between inflation, output growth and uncertainty in India: New evidence from a bivariate threshold model

This study examines the relationships between inflation, output growth and their uncertainties for India over the period from 1971 to 2015. The paper extends the existing empirical literature by employing a regime switching model to understand the dynamics of the above linkages in different inflation and output growth regimes of India. Our estimated results indicate that inflation is a positive determinant of output growth in the low‐growth regime. Furthermore, output growth significantly boosts inflation during low‐inflation regime. Thus in a situation, when both inflation and output growth are low, moderate inflation is helpful to growth as well as rise in growth feeds back into inflation. On the other hand, during high‐inflation regime, nominal uncertainty significantly reduces inflation, thus providing evidence in support of the price “stabilization” motive of the monetary authority.