Phillips Curve Relationship in India: Evidence from State-Level Analysis

Abstract

The Reserve Bank of India (RBI) introduced the RBI Working Papers series in March 2011. These papers present research in progress of the staff members of RBI and are disseminated to elicit comments and further debate. The views expressed in these papers are those of authors and not that of RBI. Comments and observations may please be forwarded to authors. Citation and use of such papers should take into account its provisional character.

The Study of Inflation Rate and Relative Impact on the Indian Economy during Covid-19 Pandemic

“…When the cost of producing goods and services increases, the purchasing power of dollar will decrease. Tariq Zafar(2016) through his study founded that the inflation from one side increases the general cost and from the other side it reduces the savings Dr.S.Jamuna, (2016) through his study "Inflation and its impact on India" founded that the Inflation is a major public concern and always been subject to heated political debate, Behera et al (2017) through his study revealed that their is an inverse relationship for both core and headline inflation, with the effect of excess demand being more significant in core inflation.Andre Roncaglia (2017) studied the relation between economic development and level of inflation and found a statistically significant inverse correlation between them. They collected data for 65 countries between 2001 and 2011 and showed that the inflation levels are affected by development-related factors.…”

Inflation expectations of households: do they influence wage-price dynamics in India?

“…In Poland, empirical estimates suggested that survey based measures of inflation expectations (of consumers, financial market participants, and business enterprises) perform better than model-consistent rational expectations in forecasting inflation (Lyziak, 2016). While several empirical studies on India validate the significance of Phillips curve to explain variations in inflation -notwithstanding differences in the specification of the Phillips curve or in the choice of inflation variable -we add a new dimension to this research by applying household inflation expectations as a proxy of forward looking expectations for testing the performance of the Phillips Curve in explaining inflation dynamics in India (for a review of empirical studies on India please refer to Behera, Wahi, & Kapur, (2017)). Using consensus forecast data in NKPC (augmented with imported inflation, i.e., international commodity prices) Guimaraes & Papi (2016) found both forward looking and backward looking components of expectations as key determinants of CPI inflation in India, with their respective weights coming close to half.…”

Macroeconomic Policies and Transmission Dynamics in India

“…Exchange rate pass-through to inflation is asymmetric (with pass-through from small depreciations being the strongest) and has declined in recent years in an environment of low inflation and declining trade openness (Patra et al, 2018). Behera, Wahi and Kapur (2017) analyse inflation dynamics using subnational data for the new CPI series -the first paper to model the inflation process for the CPI itself (vis-à-vis a few studies, including this paper, focusing on the synthetic CPI). Their estimates suggest that, first, the Phillips curve for the CPI inflation is flatter than CPI for industrial workers (CPI-IW), indicating a higher sacrifice ratio for a given disinflation and, second, a somewhat lower exchange rate pass-through in the case of the CPI inflation vis-à-vis the CPI-IW inflation.…”

“…This Section partly draws upon the more exhaustive review of the earlier literature inPatra and Kapur (2012a), andKapur and Behera (2012), and more recent reviews of inflation dynamics inBehera, Wahi and Kapur (2017), and output/demand dynamics inWahi and Kapur (2018).…”

“…The p-value of the White test for the null of non-heteroscedasticity of residuals is 0.20.10 In view of the earlier noted wedge between domestic product prices and international crude oil prices due to delayed/incomplete pass-through over most of the sample period as also due to taxation changes, the estimates of the coefficients on global oil prices appear to be biased downwards. Drawing upon the estimates inBehera, Wahi and Kapur (2017), the equation is estimated by imposing the restriction that the sum of the oil coefficients is 0.03. In case of the food inflation equation, the coefficient is restricted to 0.02.…”