Price co-movements, commonalities and responsiveness to monetary policy: Empirical analysis under indian conditions

Abstract

This study aims to empirically establish the co-movement of price indices of seemingly unrelated commodities, suggesting that the Central Bank should not decouple fluctuation in the national price index into volatile and core components. An attempt is also made to understand whether monetary policy can influence the factors responsible for price fluctuations in the states of India. The study becomes especially relevant under Indian conditions where flexible inflation targeting has been adopted by the Reserve Bank of India (Central Bank of India) and achieving the targeted inflation is a primary concern of the Indian government. The results of the empirical analysis clearly reveal that unrelated price indices co-move in India, and that monetary policy initiatives fail to influence the common factors of the states of India. The empirical results have crucial implications for the Reserve Bank of India and, as such, a conscious effort is needed to enable policy to influence the price indices of the states of India.