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Economic reforms and relative price movements in India: a 'supply shock' approach

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  • Subir Gokarn

Abstract

This paper uses the 'supply shock' approach postulated by Ball and Mankiw to make an assessment of the reform process in India. In the presence of menu costs, a positively skewed distribution implies that more producers actually increase their prices than decrease them, leading to an increase in the inflation rate in the short run. This is tantamount to a negative supply shock. Conversely, a negatively skewed distribution indicates a positive supply shock. In this paper, we argue that a process of economic reforms has a direct short-run impact on relative prices, and can thus be viewed as providing a supply shock to the economy. We first statistically validate the supply shock argument for Indian data from 1982 to 1996. We then examine the behaviour of the skewness (and some other parameters) of the distribution of relative price changes over the four governments that India has had over this period. Somewhat surprisingly, we find that the properties of the distribution of relative price changes do not indicate the kind of positive supply shock that might have been expected, given the reforms that have been initiated.

Suggested Citation

  • Subir Gokarn, 1997. "Economic reforms and relative price movements in India: a 'supply shock' approach," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 6(2), pages 299-324.
  • Handle: RePEc:taf:jitecd:v:6:y:1997:i:2:p:299-324
    DOI: 10.1080/09638199700000018
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    References listed on IDEAS

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    1. Clements, Kenneth W. & Nguyen, Phuong, 1982. "Inflation and relative prices : A decomposition analysis," Economics Letters, Elsevier, vol. 9(3), pages 257-262.
    2. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    3. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 161-193.
    4. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
    5. Clements, Kenneth W. & Nguyen, Phuong, 1981. "Inflation and relative prices : A system-wide approach," Economics Letters, Elsevier, vol. 7(2), pages 131-137.
    6. Ram, Rati, 1990. "Relative-price variability in the United States : A decomposition analysis," Economics Letters, Elsevier, vol. 32(3), pages 247-250, March.
    7. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(2), pages 287-303.
    8. Mussa, Michael L, 1977. "The Welfare Cost of Inflation and the Role of Money as a Unit of Account," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(2), pages 276-286, May.
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    Cited by:

    1. Ball, Laurence & Chari, Anusha & Mishra, Prachi, 2016. "Understanding Inflation in India," India Policy Forum, National Council of Applied Economic Research, vol. 12(1), pages 1-45.

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