Efficacy of New Monetary Framework and Determining Inflation in India: An Empirical Analysis of Financially Deregulated Regime
Publication dateAug, 2015
DetailsNIPFP Working Paper No. 153
AuthorsLekha Chakraborty and Kushagra Om Varma
Against the backdrop of the new monetary policy framework, this paper analyses the determinants of inflation in the deregulated financial regime. The paper upfront has been kept free from adherence to any particular school of thought on inflation, particularly fiscal theories of price determination (where inflation targeting is emphasised) and the monetarist axioms. Using the ARDL methodology, the determinants of inflation based on Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have been empirically tested for the financially deregulated period. The results reveal that the supply-side variables are indeed significant and have a considerable effect on inflation. This result has policy implications especially in the context of a shift from discretion to rule-based monetary policy in the context of India.