Abstract
AbstractInflation expectations are an important marker for the conduct of monetary policy. Using a Bayesian structural VAR‐X model we analyze the macroeconomic factors that determine inflation expectations of the general public in India. Besides the standard macroeconomic factors such as output, inflation rate, monetary policy, and exchange rate, we include economic policy uncertainty as an endogenous variable, while international factors such as oil prices and financial volatility that have spill‐over effects are included as exogenous variables. We find that oil prices and the exchange rate have considerable effects on expectations of inflation, and that in a longer horizon, international financial volatility also matters. Our model generates results free from the “price puzzle” and the “exchange rate puzzle” that otherwise exist in the literature on monetary transmission mechanisms for India.
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