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Dynamics of inflation in India: does the new inflation bias hypothesis provide an explanation?

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  • Naveen Srinivasan
  • Vidya Mahambare
  • M. Ramachandran

Abstract

In this paper we estimate the Reserve Bank of India's (RBI) policy response to supply shocks. In particular, we exploit an important strand of the recent literature (the new inflation bias hypothesis) to understand why the two frequently cited measures of inflation in India have persistently diverged in recent years. Specifically, it is argued that the difference in coverage and weighting pattern between the indices interacting with policies pursued by the RBI to control its preferred inflation measure WPI turned out to be inappropriate with respect to stabilizing expected CPI-IW inflation. This in turn provides an explanation for the persistent divergence between the two measures of inflation.

Suggested Citation

  • Naveen Srinivasan & Vidya Mahambare & M. Ramachandran, 2008. "Dynamics of inflation in India: does the new inflation bias hypothesis provide an explanation?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(2), pages 199-212.
    • Handle: RePEc:taf:macfem:v:1:y:2008:i:2:p:199-212
    DOI: 10.1080/17520840802252308
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    References listed on IDEAS

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    Cited by:

    1. Rajendra Narayan Paramanik & Bandi Kamaiah, 2014. "A Structural Vector Autoregression Model for Monetary Policy Analysis in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 8(4), pages 401-429, November.

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