Food Inflation in India: The Role for Monetary Policy
IMF Working Papers, September 24, 2014
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Bibliographic details
- Authors: Rahul Anand, Ding Ding, Volodymyr Tulin
- Published: September 24, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484392096.001
Summary
- Indian food and fuel inflation has remained high for several years, and second-round effects on core inflation are estimated to be large.
- The paper estimates the size of second-round effects using an estimated reduced-form general equilibrium model of the Indian economy that incorporates pass-through from headline inflation to core inflation.
- Results indicate that India's inflation is highly inertial and persistent.
- Due to second-round effects, the gap between headline inflation and core inflation decreases by about three fourths within one year as core inflation catches up with headline inflation.
- Large second-round effects stem from factors including the high share of food in household expenditure and the role of food inflation in informing inflation expectations and wage setting.
Model, Methodology, and Key Mechanisms
- Framework: Estimated reduced-form general equilibrium model of the Indian economy.
- Mechanism emphasized: Pass-through from headline inflation (food and fuel) to core inflation via:
- Inflation expectations formation.
- Wage setting processes.
- High household expenditure share of food.
Key Findings and Statistics
- India's inflation is characterized as "highly inertial and persistent."
- The gap between headline inflation and core inflation narrows by about three fourths within one year due to second-round effects.
- Large second-round effects are linked to:
- High share of food in household expenditure.
- Food inflation influencing inflation expectations.
- Food inflation affecting wage-setting behavior.
Policy Implications and Recommendations
- Monetary policy stance needs to remain tight for a considerable length of time to durably reduce the current high inflation.
- Progress on structural reforms to raise potential growth is critical to reduce the burden on monetary policy.
Subject and Keywords (as stated in the source)
- Subjects: Commodity price shocks, Financial services, Foreign exchange, Inflation, Output gap, Prices, Production, Real exchange rates, Real interest rates
- Keywords: Commodity price shocks, food inflation, forecasting, fuel inflation pass-through, Global, headline CPI inflation equation, India, Inflation, inflation dynamics, inflation expectation, interest rate, Monetary policy, Output gap, Real exchange rates, Real interest rates, WP
IMF Working Paper — "Food Inflation in India: The Role for Monetary Policy", Rahul Anand, Ding Ding, Volodymyr Tulin (Working Paper No. 2014/178).