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Speed of Adjustment and Inflation – Unemployment Tradeoff in Developing Countries – Case of India

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  • Ravindra H. Dholakia
  • Amey A. Sapre

Abstract

This paper estimates the short-run aggregate supply curve for the Indian economy over the period 1950-51 to 2008-09. Methodological improvements in this paper include the technique of estimating adaptive expectations, constrained estimation consistent with long run equilibrium, and introduction of the extended Phillips curve. The study also attempts to investigate the question of speed of recovery and the choice of adjustment paths available to policymakers in face of adverse supply shocks. Contrary to previous studies, the present study finds a regular tradeoff between inflation and output or unemployment with inflationary expectations based on the experience of past three to four years. We also find that the subtle tradeoff between the rate of output recovery and inflation is negative in India thereby implying that a strategy of fast recovery is not likely to result in high inflationary pressures.

Suggested Citation

  • Ravindra H. Dholakia & Amey A. Sapre, 2012. "Speed of Adjustment and Inflation – Unemployment Tradeoff in Developing Countries – Case of India," Journal of Quantitative Economics, The Indian Econometric Society, vol. 10(1), pages 1-16, January.
    • Handle: RePEc:jqe:jqenew:v:10:y:2012:i:1:p:1-16
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    References listed on IDEAS

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    1. Savin, N Eugene & White, Kenneth J, 1977. "The Durbin-Watson Test for Serial Correlation with Extreme Sample Sizes or Many Regressors," Econometrica, Econometric Society, vol. 45(8), pages 1989-1996, November.
    2. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    3. Paul, Biru Paksha, 2009. "In search of the Phillips curve for India," Journal of Asian Economics, Elsevier, vol. 20(4), pages 479-488, September.
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    Cited by:

    1. Kaushik Basu & C Marks, 2011. "Understanding Inflation and Controlling It," Working Papers id:4481, eSocialSciences.
    2. Ravindra H. Dholakia & Kadiyala Sri Virinchi, 2017. "How Costly is the Deliberate Disinflation in India? Estimating the Sacrifice Ratio," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(1), pages 27-44, March.
    3. Dholakia, Ravindra H. & Kadiyala Sri Virinchi, 2015. "How Costly is the Deliberate Disinflation in India? Estimating the Sacrifice Ratio," IIMA Working Papers WP2015-08-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    4. Ravindra H. Dholakia, 2020. "A Theory of Growth and Threshold Inflation with Estimates," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(3), pages 471-493, September.
    5. Dholakia, Ravindra H., 2014. "Cost and Benefit of Disinflation Policy in India," IIMA Working Papers WP2014-02-08, Indian Institute of Management Ahmedabad, Research and Publication Department.
    6. Dholakia, Ravindra H., 2014. "Sacrifice Ratio and Cost of Inflation for the Indian Economy," IIMA Working Papers WP2014-02-04, Indian Institute of Management Ahmedabad, Research and Publication Department.

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