Impact of Macroeconomic Factors on Inflation: An Assessment on Indian Economy by using Vector Auto-Regressive modeling

Mihir Dash, Gopi Krishna Pachetas

Abstract


Inflation is the sustained rise in prices of commodities. Central Banks have the critical responsibility of ensuring price stability; however, every attempt should be made to ensure that price stability should not hit economic growth. Thus, it becomes imperative for Central Banks to determine the key fiscal and monetary factors that have greatest impact on domestic price levels. Based on these factors, it can tackle the problem of inflation effectively and efficiently. Further, there are several global price indices and factors that need to be factored in while tackling problem of inflation. The objective of the current study is to empirically determine the macroeconomic factors that play a significant role in influencing inflation in India. The study considers international food and oil price indices amongst other macroeconomic variables such as fiscal deficit, index of industrial production, exchange rate, MIBOR, and money supply in order to explain inflation. Monthly data for each of the above variables was collected for the research period 2000-10.The study is based on Vector Auto-Regressive modeling. The Augmented Dickey-Fuller Unit Root Test was performed to test for stationarity of all of the time series data. The results of the Granger causality tests indicate that fiscal indicators such as fiscal deficit and international factors such as international food and oil price indices play a significant role in influencing inflation. The research outcomes conform to the results of several earlier studies. 


Keywords


inflation, fiscal and monetary factors, macroeconomic factors, vector autoregressive modeling, Granger causality test

Full Text:

PDF

References


Agha, A.I. and Khan, M.S. (2006). An empirical analysis of fiscal imbalances and inflation in Pakistan. State Bank of Pakistan Working Papers

Barth, J. R. and Bennett, J. T. (1975). Cost-push versus Demand-pull Inflation: Some Empirical Evidence. Journal of Money, Credit & Banking, Vol. 7(3), 391-397.

Basu, K. (2011). Understanding Inflation and Controlling It, New Delhi, India.

Batten, D.S. (1981). Inflation: The Cost-Push Myth. Federal Rerseve Bank of St. Louis Review, Vol. 63(6), 20-26.

Bullard, J. (2011). Measuring Inflation: The Core is Rotten. Federal Reserve Bank of St. Louis Review, Vol. 93(4), 223-33.

Cecchetti, S.G. (1996). Measuring Short-Run Inflation for Central Bankers. Cambridge, M.A.

Catao, L. and Terrones, M.E. (2003). Fiscal Deficits and Inflation, IMF Working Papers.

Fisher, I. (1930). The Theory of Interest. Philadelphia: Porcupine Press.

Friedman, M. (1968). The Role of Monetary Policy. American Economic Review, Vol. 58(1), 1–17.

John, R.M. (2002). Inflation in India: An analysis using Post-Liberalization data. IGIDR Working Paper.

Kar, S. (2010). A Periodic Autoregressive Model of Indian WPI Inflation. Margin - The Journal of Applied Economic Research, Vol. 4(3), 279–292.

Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan (reprinted 2007).

Khundrakpam, J.K. and Pattanaik, S. (2010). Global Crisis, Fiscal Response and Medium-term Risks to Inflation in India. Reserve Bank of India Occasional Papers, Vol. 31(2), 1-29.

Pattanaik, A. (2010). Study of Inflation in India: A Cointegrated Vector Autoregression Approach. Journal of Quantitative Economics, Vol. 8(1), 118-129.

Pattanaik, S. and Nadhanael, G.V. (2011). Why Persistent High Inflation Impedes Growth? An Empirical Assessment of Threshold Level of Inflation for India. Reserve Bank of India.

Parikh, K. S. (2010). A Viable and Sustainable System of Pricing of Petroleum Products. New Delhi: Government of India.

Schultze, C.L. (1959). Recent Inflation in the United States. Study Paper No. 1 for Joint Economic Committee, Study of Employment, Growth, and Price Levels, Washington.

Singh, B.K. (2012). An Assessment of Inflation Modelling in India. Indian Council for Research on International Economic Relations, Working Paper No. 259.

Virmani, V. (2003). Modeling Inflation in India - An Error Correction Approach, available at: http://www.indiainfoline.com/impa.pdf

Watson, M.W. (1994). Vector Autoregressions and Cointegration. in Engel, R. and McFadden, D.. Handbook of Econometrics IV. Amsterdam: Elsevier, 2844-2915.


Refbacks

  • There are currently no refbacks.


Copyright (c) 2016 International Journal of Decision Sciences & Applications- IJDSA

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Creative Commons License
International Journal of Decision Sciences & Applications- by Umit Hacioglu is licensed under aCreative Commons Attribution-NonCommercial 4.0 International License.

 

"SSBFNET SSBFNET SSBFNET