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Modelling Inflation in India
, M. Parameswaran
Published in Springer
Volume: 19
Issue: 3
Pages: 555 - 581
The Reserve Bank of India pursues inflation targeting, which is based on the premise that inflation is related to the ‘output gap', defined as the deviation of output from its natural level. We present an alternative model of inflation derived from structuralist macroeconomics, the highlight of which is an agricultural sector prone to fluctuating output. A distinctive feature of the model is that inflation is related to the relative price of agricultural goods, in addition to other determining variables. We then subject both the models to econometric testing that involved alternative measures of inflation, sample periods and data frequencies. The output-gap model is rejected while the structuralist model is statistically validated in the tests. This evidence points strongly to the need to take agricultural prices into account when designing anti-inflationary policy in India.
About the journal
JournalData powered by TypesetJournal of Quantitative Economics
PublisherData powered by TypesetSpringer
Open AccessNo