India’s Inflation Process Before and After Flexible Inflation Targeting

Author/Editor:

Patrick Blagrave ; Weicheng Lian

Publication Date:

November 13, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We study the inflation process in India, focusing on the periods before and after the adoption of flexible inflation-forecast targeting (FIT) in India. Our analysis uses several approaches including standard Phillips curve estimation for headline and core inflation, an examination of the sensitivity of medium-term inflation expectations to inflation surprises, and the properties of convergence between headline and core inflation. Results indicate an important role for domestic factors in driving the inflation process, and there is evidence that expectations have become more anchored since 2015. This result could be attributable to FIT adoption, or to persistently low food prices which dominate the post-FIT-adoption period. The policy implications of these structural changes in the inflation process are investigated using a semi-structural model calibrated to the Indian economy.

Series:

Working Paper No. 2020/251

Subject:

Frequency:

regular

English

Publication Date:

November 13, 2020

ISBN/ISSN:

9781513561233/1018-5941

Stock No:

WPIEA2020251

Format:

Paper

Pages:

26

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