The study examines the relationships among money supply, output and prices. Quarterly data were sourced from the Federal Reserve Bank of St. Louis, which spanned from 1996 Q2 to 2019 Q1. Four variables were included in the study: GDP, inflation (Consumer Price Index [CPI]) and two measures of money supply (M1 and M3). The findings of the study reveal that money supply is correlated with India’s output as well as inflation. Johansen’s test of co-integration reveals the existence of a long-term relationship among the variables. Another striking finding of this study is that neither M1 nor M3 could cause output (GDP) in the short run, but both Granger-cause inflation in the short run, which may be attributed to the output growth capacity limit of the country. The monetary policy disturbance in relation to other variables was examined through a structural vector autoregressive (SVAR) model that indicates that the two measures of money supply exert a positive impact on GDP. Similarly, the finding also shows that a monetary policy shock from the two measures of money supply causes a positive and continuous increase in inflation in India. Thus, money supply measure M3 is a potential indicator of movement in India’s output; hence the monetary authority should be mindful of inflation while targeting output expansion through money supply.

PurposeThe study focuses on examining the impact of the supply shock on the Indian macroeconomic variables during the COVID-19 period.Design/methodology/approachTime-varying factor augmented vector autoregressive model has been employed to study the asymmetry in transmission of supply shock on Indian economy during pre- and post-COVID-19 times.FindingsThe authors find that with supply shock, retail food inflation outpaced in COVID-19 times. Production levels reported by IIP fell to abysmally low levels in the post-COVID-19 times when the economy stalled. The liquidity stimulus provided by the central bank led to the negative response of policy rates to the supply shocks during the COVID-19 times.Originality/valueThe study stands novel in examining the impact of COVID-19 pandemic on Indian economy through the lenses of asymmetric transmission of supply shock during pre- and post-COVID-19 times.

This study analyses the impact of inflation expectations from 17 July 2016 to 20 August 2022 using the actual future consumer price index (CPI) in the Structural Factor Augmented Vector Autoregressive (SFAVAR) Framework. Around 85 percent of inflation expectations are self-explanatory in the long run. Hence, it is important to keep inflation expectations at historically low levels because in a developing country like India, inflation expectations are rising rapidly but are rigid when falling.