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Inflation Dynamics and Monetary Policy in India: A New Keynesian Phillips Curve Perspective

Inflation Dynamics and Monetary Policy in India: A New Keynesian Phillips Curve Perspective The present study estimates various specifications of the New Keynesian Phillips Curve (NKPC) models for India over 1996Q2 to 2017Q2 using Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflation, separately. The empirical results suggest that the data support all the specifications of the Phillips curve models based on both the CPI and WPI inflations. However, the backward looking and hybrid models provide robust results for both the inflation indices. While the forward-looking behaviour dominates the CPI inflation trajectory, the backward-looking behaviour greatly influences the trajectory of WPI inflation. Also, a small-to-moderate degree of persistence is evident in both the CPI and WPI inflation. The output gap, which mainly represents the demand side pressures, turns up the major force determining both the CPI and WPI inflations. Besides the output gap, real effective exchange rate (reer), international crude oil price inflation, global non-fuel commodity price inflation and rainfall have a modest impact on the CPI and WPI inflations.JEL Classification: E12, E52, C36, C14 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South Asian Journal Of Macroeconomics And Public Finance SAGE

Inflation Dynamics and Monetary Policy in India: A New Keynesian Phillips Curve Perspective

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References (80)

Publisher
SAGE
Copyright
© 2019 SAGE Publications
ISSN
2277-9787
eISSN
2321-0273
DOI
10.1177/2277978719861186
Publisher site
See Article on Publisher Site

Abstract

The present study estimates various specifications of the New Keynesian Phillips Curve (NKPC) models for India over 1996Q2 to 2017Q2 using Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflation, separately. The empirical results suggest that the data support all the specifications of the Phillips curve models based on both the CPI and WPI inflations. However, the backward looking and hybrid models provide robust results for both the inflation indices. While the forward-looking behaviour dominates the CPI inflation trajectory, the backward-looking behaviour greatly influences the trajectory of WPI inflation. Also, a small-to-moderate degree of persistence is evident in both the CPI and WPI inflation. The output gap, which mainly represents the demand side pressures, turns up the major force determining both the CPI and WPI inflations. Besides the output gap, real effective exchange rate (reer), international crude oil price inflation, global non-fuel commodity price inflation and rainfall have a modest impact on the CPI and WPI inflations.JEL Classification: E12, E52, C36, C14

Journal

South Asian Journal Of Macroeconomics And Public FinanceSAGE

Published: Dec 1, 2019

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