Abstract
Inflation is the sustained rise in the 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 the 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 the 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 the 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 were 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.
Highlights
Inflation is a highly controversial economic concept which has seen many modifications ever since it was first defined by neoclassical economists
Keynes (1936) had earlier disputed such an argument by negating the fundamental neoclassical assumption of full employment. He argued of the existence of underemployment in the economy, so that an increase in money supply would lead to an increase in aggregate demand, which in turn would lead to an increase in output and employment
The present study considers a mix of all three categories of variables in studying inflation in India
Summary
Inflation is a highly controversial economic concept which has seen many modifications ever since it was first defined by neoclassical economists. India has been experiencing significantly high levels of inflation in the aftermath of the global financial crisis of 2007-08 This may be partly due to the fiscal and monetary expansionary policies adopted by Government of India and Reserve Bank of India (RBI) during crisis, and partly due to reform measures such as the Sixth Central Pay Commission, high subsidy programs, social sector schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act and Right to Education, and so on, which have resulted in a significant increase in disposable income. The fifth section concludes and makes certain recommendations based on the research findings
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