## Inflation Expectations and Monetary Policy in India: An Empirical Exploration

_IMF Working Papers, April 1, 2010_

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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

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### 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/inflation-expectations-and-monetary-policy-in-india-an-empirical-exploration-23719_