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Identifying Inflation Dynamics in India in the Post Reform Period

Identifying Inflation Dynamics in India in the Post Reform Period The present study aims at examining the inflation dynamics in Indian context with a particular focus on its determinants from 1991–1992Q1 to 2017–2018Q4. The purpose of this study is to investigate the role of monetary, fiscal, structural and external variables in explaining inflationary tendencies in India in the post economic reform period. To identify the determinants fuelling the inflationary tendencies, the study employs ARDL bounds testing procedure followed by the VECM Granger causality test. The findings indicate that interest rate shock and output growth mitigates inflation while rupee depreciation, money supply generate inflationary pressures in the economy. Moreover, fiscal deficit has inflationary impact only in the short run. The positive link between inflation and openness refutes the applicability of Romer’s hypothesis in the Indian context. VECM based Granger causality indicates that money supply and interest rate causes both output and inflation, which suggests monetary policy in India has an important role to play in the process of economic growth and price stability.JEL Classification: E3, E4, F6, E620 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South Asian Journal of Macroeconomics and Public Finance SAGE

Identifying Inflation Dynamics in India in the Post Reform Period

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Publisher
SAGE
Copyright
© 2022 The Author(s)
ISSN
2277-9787
eISSN
2321-0273
DOI
10.1177/22779787221097782
Publisher site
See Article on Publisher Site

Abstract

The present study aims at examining the inflation dynamics in Indian context with a particular focus on its determinants from 1991–1992Q1 to 2017–2018Q4. The purpose of this study is to investigate the role of monetary, fiscal, structural and external variables in explaining inflationary tendencies in India in the post economic reform period. To identify the determinants fuelling the inflationary tendencies, the study employs ARDL bounds testing procedure followed by the VECM Granger causality test. The findings indicate that interest rate shock and output growth mitigates inflation while rupee depreciation, money supply generate inflationary pressures in the economy. Moreover, fiscal deficit has inflationary impact only in the short run. The positive link between inflation and openness refutes the applicability of Romer’s hypothesis in the Indian context. VECM based Granger causality indicates that money supply and interest rate causes both output and inflation, which suggests monetary policy in India has an important role to play in the process of economic growth and price stability.JEL Classification: E3, E4, F6, E620

Journal

South Asian Journal of Macroeconomics and Public Finance – SAGE

Published: Jun 1, 2023

Keywords: Inflation; money; interest rate; output; exchange rate; fiscal deficit; trade openness; ARDL; Granger causality VECM test

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