Phillips Curve and Inflation in India

Abstract

The objectives of the study are to investigate the trend and linkages of inflation, unemployment, Gross domestic product and interest rate and to analyse the validity of Phillips curve in India in post reform period. The study is based on secondary data on inflation, unemployment, interest rate and GDP in India from 1991 to 2015. The data have been collected from World Bank Development Indicators from the world bank website. The data are analyzed through tables, graphs, correlation, regression and granger causality tests. The average inflation rate in post reform period is 6.70 whereas unemployment rate is 3.99, interest rate is 12.83 and GDP growth rate is 6.51. The fluctuation in inflation rate is more than other variables because the standard deviation of inflation rate is 2.70. The coefficient of linear trend of inflation is-0.185 and that of unemployment is-0.0277. The Pearson's coefficient matrix shows that the value of correlation coefficient between inflation and unemployment is-0.02, which implies that there is a negative and low correlation between them. The relation between inflation and GDP is-0.31 which implies that there is a negative and low correlation between inflation and GDP. It is also found from the table that there is a positive and high correlation between inflation and interest rate which is 0.61. Regression coefficient of unemployment is negative but regression coefficient of interest rate is positive. The Regression coefficient of unemployment and interest rate are significant as significant values are 0.036 and 0.001 respectively. The coefficient of GDP is not significant. Higher interest rate results higher inflation since the coefficient is positive. There is negative relationship between inflation and unemployment as coefficient of determination is-0.02. This establishes the Phillips Curve. Since the P value is 0.91, the regression coefficient is not significant. As the regression is based on long time series data of 25 years, the relation between inflation and unemployment is acceptable because the long run relationship is not significant as per macroeconomic literature.