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

2019 ◽  
Vol 8 (2) ◽  
pp. 144-179 ◽  
Author(s):  
Bhavesh Salunkhe ◽  
Anuradha Patnaik
Keyword(s):  
Price Index ◽  
Phillips Curve ◽  
Consumer Price Index ◽  
Wholesale Price ◽  
New Keynesian ◽  
Real Effective Exchange Rate ◽  
Output Gap ◽  
Moderate Degree ◽  
New Keynesian Phillips Curve ◽  
Price Inflation

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

What determines the gold inflation relation in the long-run?

2017 ◽  
Vol 34 (4) ◽  
pp. 430-446 ◽  
Author(s):  
Satish Kumar
Keyword(s):  
Kalman Filter ◽  
Price Index ◽  
Wholesale Price ◽  
Gold Price ◽  
Real Effective Exchange Rate ◽  
Price Inflation ◽  
Content Type ◽  
Dynamic Relation ◽  
Long Run

Purpose The author aims to examine the long-run dynamic relation between gold price and inflation in the Indian context from 1982 to 2015. The author measures inflation using consumer price index and wholesale price index (WPI). However, this study focuses on the long-run dynamic relation between gold price–WPI inflation. Design/methodology/approach The author uses Johansen’s cointegration technique (Johansen, 1991); single equation error correction model based on Pesaran et al. (2001) and Kanioura and Turner (2005); and the Saikkonen and Lütkepohl (2000) approach. The author also uses a time-varying regression framework in level form based on Kalman filter to examine the dynamic nature of gold–WPI relation. Findings The author finds no evidence of cointegration between gold and WPI. However, The author reports a significant dynamic relation between gold and inflation using a Kalman filter framework, and the comovement between these variables has in fact increased in the past decade. The results further indicate that variation in gold’s sensitivity to inflation can be explained by real effective exchange rate which supports the notion of using gold as an alternative to paper currency. Moreover, the WPI beta of gold is found to be predicted by both short- and long-term interest rate changes highlighting the monetary value of gold as a valuable asset. Practical implications From an emerging economy point of view, the results have implications for policy makers, particularly the central banks. The results of this paper caution the Reserve Bank of India against increasing its gold holdings as a reserve asset presuming that gold would preserve its purchasing power parity, at the same time providing a hedge against inflation. Originality/value To the best of the author’s knowledge, this is the first study to examine the gold price–inflation relation in the Indian market for such a long period of time. More importantly, the study shows that the changes in gold’s long-term sensitivity to WPI can be forecast using fundamental variables like interest rates.

scholarly journals Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?

2006 ◽  
Vol 96 (1) ◽  
pp. 303-320 ◽  
Author(s):  
Jeremy Rudd ◽  
Karl Whelan
Keyword(s):  
Closed Form ◽  
Empirical Evidence ◽  
Hybrid Model ◽  
Rational Expectations ◽  
Phillips Curve ◽  
New Keynesian ◽  
Output Gap ◽  
New Keynesian Phillips Curve ◽  
Inflation Dynamics ◽  
Forward Looking

The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized for failing to account for the dependence of inflation on its own lags. In response, many studies employ a “hybrid” specification in which inflation depends on its lagged and expected future values, together with a driving variable such as the output gap. We consider some simple tests of the hybrid model that are derived from its closed form. We find that the hybrid model describes inflation dynamics poorly, and find little empirical evidence for the type of rational, forward-looking behavior that the model implies.

scholarly journals Analysis of Inflation Indicators during the Period of UPA Government (India)

2008 ◽  
Vol 4 (4) ◽  
pp. 246-258
Author(s):  
J K Sachdeva
Keyword(s):  
Price Index ◽  
Consumer Price Index ◽  
Wholesale Price ◽  
Food Prices ◽  
First Year ◽  
Official Statistics ◽  
Price Inflation ◽  
The Real ◽  
The Government ◽  
Lagged Effect

Rising food prices hurt poor the most. The real burden of inflation is always higher than what the WPI figures suggest. Right through 2007, consumer inflation was running much higher for all categories. During the last month of 2007, inflation as measured by the consumer price index was above 5 per cent for the three categories of workers that are tracked by the official statistics, even as wholesale price inflation was just 3.5 per cent. Even as the government pulls out all stops to douse the fires of inflation, one should not forget that it is the outcome of years of neglect of agriculture. It has been observed that prices were highly volatile during the first half of 2008.  UPA government took office in may, 2004. Leaving the first year of office as it is with period lagged effect of earlier government, an analysis of period between April, 2005 to May 2008 (leaving highly volatile period from April, 2004 to March, 2005 and June, 2008 to July 2008, by the time this paper is written) needs to be carried out to see trends in prices.

scholarly journals A hybrid model of new Keynesian Phillips Curve: An application in Indonesia

2015 ◽  
Vol 18 (3) ◽  
pp. 311
Author(s):  
Aloysius Deno Hervino
Keyword(s):  
Hybrid Model ◽  
Inflation Rate ◽  
Phillips Curve ◽  
Oil Prices ◽  
Fuel Oil ◽  
New Keynesian ◽  
Output Gap ◽  
New Keynesian Phillips Curve ◽  
Inflation Dynamics ◽  
Steady State Model

This study attempts to prove whether inflation dynamics in Indonesia can be explained by the hybrid model of New Keynesian Phillips Curve (NKPC). Output gap variable and dummy variable are also incorporated in this study as the external shock of the increase in fuel oil prices in 2004. By using a steady state model, it can be concluded that inflation dynamics in Indonesia could be explained by the hybrid model of NKPC. The variable of forward looking has significant effect on inflation dynamics, but the variable of inflationary pressure (output gap) has no significant effect on inflation dynamics. In addition, the increase in fuel oil prices in 2004 also gives pressure on the inflation rate, but when interacting with the variable of inflation (backward and forward), it even reduces its pressure on the inflation rate.

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