Inflation Expectations and Monetary Policy in India: An Empirical Exploration
IMF Working Papers, April 1, 2010
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- Inflation Expectations and Monetary Policy in India: An Empirical Exploration
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Bibliographic details
- Authors: Michael Debabrata Patra, Partha Ray
- Published: April 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451982640.001
Summary
- The paper pursues a computationally intensive approach to generate future inflation.
- It explores the determinants of inflation expectations by estimating a new Keynesian type Phillips curve that takes into account:
- country-specific characteristics,
- the stance of monetary and fiscal policies,
- marginal costs, and
- exogenous supply shocks.
- Empirical results indicate that high and climbing inflation could easily seep into people’s anticipation of future inflation and linger.
- There is a reputational bonus for monetary policy to act against inflation now rather than going for cold turkey when societal compulsions reach a critical mass.
Empirical approach and findings
- Methodology:
- Computationally intensive generation of future inflation paths.
- Estimation of a new Keynesian type Phillips curve incorporating multiple country- and policy-specific factors.
- Key empirical finding:
- Persistence of inflation expectations: high and climbing inflation tends to become embedded in expectations and can persist.
- Drivers analyzed:
- Monetary policy stance,
- Fiscal policy stance,
- Marginal costs,
- Exogenous supply shocks,
- Country-specific characteristics.
Policy implications and recommendations
- Monetary policy should address inflation proactively to preserve or build reputational credibility.
- Delayed or reactionary “cold turkey” tightening when societal pressures are at a critical mass is suboptimal compared with earlier action to counter rising inflation expectations.