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

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

Do Inflation Expectations Matter for Small, Open Economies? Empirical Evidence from the Solomon Islands

“…Most studies have applied the HNKPC model in modelling inflation dynamics. We follow closely the extended HNKPC model proposed by Meng (2016), Sediakgotla (2017) and Salunkhe and Patnaik (2019). These studies have incorporated economic variables that to some extent are suitable and available for describing the inflationary development process in the Solomon Islands.…”

“…Sediakgotla (2017) points out that the GMM estimation technique is well known for its advantage of correcting unknown forms of autocorrelation and heteroscedasticity as well for being relatively simple and easy to interpret. Moreover, the GMM has been a popular methodology used in the estimation of the NKPC and HNKPC models initially used by Gali and Gertler (1999) and subsequently in other studies by Gali and Monacelli (2005), , Hervino (2015), Meng (2016), Sakurai (2016), Sediakgotla (2017) and Salunkhe and Patnaik (2019). The GMM proposed by Hansen (1982) is a more preferred estimation method compared to its alternative as it is relatively simple to use given its computation simplicity whereby specifiying the full data generating process for the forcing variable is not required and second for its robustness in correcting mispecifications (Mavroeidis et al 2014).…”

“…Empirical studies that have applied the HNKPC to estimate inflation dynamics have mainly emerged from developed countries (Gali and Gertler 1999;Tomfort 2011;Dufour et al 2005;Abbas et al 2016) and emerging economies (Ishak-Kasim and Ahmed 2010; Mukhtar and Yousaf 2014;Meng 2016;Sakurai 2016;Salunkhe and Patnaik 2019). Moreover, a dearth of empirical studies exists in small island economies, especially in the case of PICs.…”

“…The results revealed the significance of the labour share and aggregate output in the HNKPC model while the relative wage and terms of trade coefficients were statistically insignificant at the conventional level, although they obtained the correct signs and were economically significant. Moreover, Salunkhe and Patnaik (2019) analysed the inflation dynamics in India by including the REER and international crude oil price inflation to account for supply shocks originating from the external sector. The authors have found that both variables have a modest impact on India's inflation.…”

Measuring Demand and Supply Shocks From COVID-19: An Industry-Level Analysis for India

“…19,2]. The range of elasticity begins at 1.19 (following Goyal & Kumar, 2018), however the upper value was chosen keeping in mind the wide variation in the elasticity of supply derived by studies which estimate the aggregate supply curve of India (Salunkhe & Patnaik, 2019).…”