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Inflation Model for India in the Context of Open Economy

Author

Listed:
  • Ajit R. Joshi

    (Ajit R. Joshi is Research Scholar, Indian Institute of Technology Madras, Chennai 600036, and Reserve Bank of India, Mumbai, India. Email: ajitjoshirbi@gmail.com)

  • Debashis Acharya

    (Debashis Acharya is Reader, Department of Economics, University of Hyderabad, Hyderabad 500046, India. Email: debuiitm@gmail.com)

Abstract

In this article, an atheoretic model is built to explain and forecast inflation, using variables that capture domestic as well as foreign influences on inflation. In all, five specifications of models are estimated, one with only domestic variables and four with one of the foreign price variables, namely, Commodity Price Index (COMM), US Producer Price Index (USPPI), crude oil price (CRUDE), industrial countries’ Consumer Price Index (CPI) (INDCPI). It is found that models with foreign price indicators provide better in-sample fit than the baseline model with only domestic variables. Among the models with foreign price variables, the Commodity Price Index (COMM) performs as the best foreign price variable among the set used, in terms of both in-sample and out-of-sample root mean squared errors (RMSE).

Suggested Citation

  • Ajit R. Joshi & Debashis Acharya, 2011. "Inflation Model for India in the Context of Open Economy," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 12(1), pages 39-59, March.
    • Handle: RePEc:sae:soueco:v:12:y:2011:i:1:p:39-59
    DOI: 10.1177/139156141001200103
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    References listed on IDEAS

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    Cited by:

    1. Biswajit Maitra & Tafajul Hossain, 2020. "Inflation in India: causes and anti-inflationary policy perception," International Journal of Economic Policy Studies, Springer, vol. 14(2), pages 363-387, August.
    2. Haroon Mumtaz & Nitin Kumar, 2012. "An application of data-rich environment for policy analysis of the Indian economy," Joint Research Papers 2, Centre for Central Banking Studies, Bank of England.
    3. Rakesh Mohan & Partha Ray, 2019. "Indian Monetary Policy in the Time of Inflation Targeting and Demonetization," Asian Economic Policy Review, Japan Center for Economic Research, vol. 14(1), pages 67-92, January.

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    More about this item

    Keywords

    JEL: E31; JEL: E37; Inflation model; open economy; inflation in India; inflation forecast;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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