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Inflation Dynamics in India: An Analysis

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  • Nair, Manju S

Abstract

India has exhibited high variability in inflation during the last eight years owing to both internal and external factors. The Global Financial Meltdown, recurrent increase in global oil prices, wage employment programmes, widening current account deficits etc resulted in fluctuations in inflation. These factors have a direct influence on variables like output, money supply, exchange rate which in turn affect inflation. In this context, the study employs a Cointegrated Vector Auto Regression framework to analyse inflation dynamics in India. The determinants identified to affect inflation in India include broad money supply, exchange rate and output, which is substantiated by the existing theories of inflation. There exists a cointegrating relation between inflation and its determinants and in the short run inflation adjusts to past changes and policy fundamentals as inferred from the Error Correction Model. The Impulse Response Function traces out a stable relationship of inflation with its identified determinants.

Suggested Citation

  • Nair, Manju S, 2014. "Inflation Dynamics in India: An Analysis," MPRA Paper 57110, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:57110
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    References listed on IDEAS

    as
    1. I, Sahadudheen, 2012. "A cointegration and error correction approach to the determinants of inflation in India," MPRA Paper 65561, University Library of Munich, Germany, revised 2012.
    2. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    3. Nachane, Dilip M., 2006. "Econometrics: Theoretical Foundations and Empirical Perspectives," OUP Catalogue, Oxford University Press, number 9780195647907.
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    More about this item

    Keywords

    Inflation dynamics; co-integration; impulse response;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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