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Phillips curve relationship in an emerging economy: Evidence from India

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  • Behera, Harendra
  • Wahi, Garima
  • Kapur, Muneesh

Abstract

This paper revisits the issue of determinants of inflation in a major emerging economy in a Phillips curve framework against the backdrop of an intense global debate on the weakening inflation-output relationship, and makes two key contributions in relation to existing studies. First, with the Indian central bank moving towards a flexible inflation targeting framework based on the consumer price index (CPI) inflation, this paper is the first attempt in the Indian context to model dynamics of the CPI inflation. Second, in view of the recent international evidence that the observed flattening of the Phillips curve might more be an artefact of the national inflation rates being the target of monetary policy, and limited data span for the new CPI inflation series, this paper explores the Phillips curve relationship in India using sub-national data in a panel framework. The estimates in this paper confirm the presence of a conventional Phillips curve specification. Excess demand conditions have the expected hardening effect on inflation. Exchange rate movements are also found to impact inflation.

Suggested Citation

  • Behera, Harendra & Wahi, Garima & Kapur, Muneesh, 2018. "Phillips curve relationship in an emerging economy: Evidence from India," Economic Analysis and Policy, Elsevier, vol. 59(C), pages 116-126.
    • Handle: RePEc:eee:ecanpo:v:59:y:2018:i:c:p:116-126
    DOI: 10.1016/j.eap.2018.06.001
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    More about this item

    Keywords

    Consumer price inflation; Exchange rate pass-through; India; Monetary policy; Phillips curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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