Munich Personal RePEc Archive

Inflation Dynamics in India: An Analysis

Nair, Manju S (2014): Inflation Dynamics in India: An Analysis.

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India has exhibited high variability in inflation during the last eight years owing to both internal and external factors. The Global Financial Meltdown, recurrent increase in global oil prices, wage employment programmes, widening current account deficits etc resulted in fluctuations in inflation. These factors have a direct influence on variables like output, money supply, exchange rate which in turn affect inflation. In this context, the study employs a Cointegrated Vector Auto Regression framework to analyse inflation dynamics in India. The determinants identified to affect inflation in India include broad money supply, exchange rate and output, which is substantiated by the existing theories of inflation. There exists a cointegrating relation between inflation and its determinants and in the short run inflation adjusts to past changes and policy fundamentals as inferred from the Error Correction Model. The Impulse Response Function traces out a stable relationship of inflation with its identified determinants.

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