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Purpose: The study focuses on examining the impact of the supply shock on the Indian macroeconomic variables during the COVID-19 period. Design/methodology/approach: Time-varying factor augmented vector autoregressive model has been employed to study the asymmetry in transmission of supply shock on Indian economy during pre- and post-COVID-19 times. Findings: The authors find that with supply shock, retail food inflation outpaced in COVID-19 times. Production levels reported by IIP fell to abysmally low levels in the post-COVID-19 times when the economy stalled. The liquidity stimulus provided by the central bank led to the negative response of policy rates to the supply shocks during the COVID-19 times. Originality/value: The study stands novel in examining the impact of COVID-19 pandemic on Indian economy through the lenses of asymmetric transmission of supply shock during pre- and post-COVID-19 times. [ABSTRACT FROM AUTHOR]

The nexus between inflation and trade openness has been one of the major concerns among the researchers and policy makers in both developed and developing economies. The exact relationship between inflation and openness is still in ambiguity. Various studies have been done for different countries and regional groups using different methodologies to measure the relationship between openness and inflation, but all remained in vain. Although there are different views regarding this relationship, most of the empirical studies supported the Romer's hypothesis (Q J Econ 108(4):869–903, 1993) of an inverse association between openness and inflation in the economy. The present study has made an attempt to examine the factors influencing the price level, especially trade openness, in India from 1974–1975 to 2015–2016. For empirical investigation, the study has employed autoregressive distributed lag (ARDL) model bounds testing approach to co-integration (Pesaran et al., J Appl Econ 16(3):289–326, 2001). The obtained results revealed the presence of positive relationship between inflation and trade openness in India, which negates the Romer's hypothesis. [ABSTRACT FROM AUTHOR]

The relationship between stock returns and inflation has been tested in relation to hedge ability of stocks against inflation. The study covers a period of over five decades (1960–2014) and examines both pre- and post-structural economic reform experiences in India. This empirical analysis exploits the techniques of both Discrete and Continuous wavelet transforms. In the methodological framework of Wavelets, first it analyses the individual volatility characteristics of stock returns and inflation using wavelet power spectra, followed by their relationship at different time horizons. The empirical evidence suggests the two variables to be independent across time horizons lending support to stocks as instrument of hedge against inflation. The results are robust to techniques and sub-samples, as well. [ABSTRACT FROM AUTHOR]

This paper revisits the issue of determinants of inflation in a major emerging economy in a Phillips curve framework against the backdrop of an intense global debate on the weakening inflation-output relationship, and makes two key contributions in relation to existing studies. First, with the Indian central bank moving towards a flexible inflation targeting framework based on the consumer price index (CPI) inflation, this paper is the first attempt in the Indian context to model dynamics of the CPI inflation. Second, in view of the recent international evidence that the observed flattening of the Phillips curve might more be an artefact of the national inflation rates being the target of monetary policy, and limited data span for the new CPI inflation series, this paper explores the Phillips curve relationship in India using sub-national data in a panel framework. The estimates in this paper confirm the presence of a conventional Phillips curve specification. Excess demand conditions have the expected hardening effect on inflation. Exchange rate movements are also found to impact inflation. [ABSTRACT FROM AUTHOR]

Central banks in emerging market economies often grapple with understanding the monetary policy response to an inter-sectoral terms of trade shock. To address this, we develop a three sector closed economy NK-DSGE model calibrated to India. Our framework can be generalized to other emerging markets and developing economies. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a grain and vegetable sector. The government procures grain from the grain market and stores it. We show that the procurement of grain leads to higher inflation, a change in the sectoral terms of trade, and a positive output gap because of a change in the sectoral allocation of labor. We compare the transmission of a single period positive procurement shock with a single period negative productivity shock and discuss the implications of such shocks for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies. [ABSTRACT FROM AUTHOR]

This paper provides Indian evidence on sub-national PPPs that point to considerable spatial price heterogeneity within the country, based on Indian National Sample Survey (NSS) data. The prices of various commodities have been generated from the household specific unit values obtained from the information on expenditures and quantities from the NSS unit records. This paper shows that the CPD model, proposed in the cross country context, can be adapted to the household context to estimate spatial prices in the intra country context. The proposed CPD based model is shown to be formally equivalent to certain well known fixed weight price indices under certain parametric configurations. The empirical contribution includes a systematic comparison between the spatial price indices from alternative models, namely the CPD and utility based models, and the result that the utility based methods point to a much greater extent of spatial price heterogeneity than is suggested by the CPD type models. The results also record the sensitivity of the spatial price indices to the choice of commodities in the utility based approach. The pairwise comparison of estimates suggests that commodity selection may be more important than model selection in its impact on the spatial price estimates, though the latter is important as well. The study provides estimates of rural-urban differentials in spatial price indices that suggest some interesting differences between the constituent states. The results make a strong case for further research on the topic of sub-national PPPs in the context of large heterogeneous countries. [ABSTRACT FROM AUTHOR]

Absence of inflation hedges and lack of inflation indexation in India make the society very sensitive to inflationary pressures. A potential source of such pressures that is often mentioned is the depreciation of the Indian rupee which has occurred over the last few years. This study computes the exchange rate pass-through into import prices of India at the aggregate level for the period 2003m1 to 2013m3 using both trade-weighted and bilateral USD exchange rates. The study also examines the asymmetry and non-linearity in the exchange rate pass-through at the aggregate level. The results suggest that there is more than complete exchange rate pass-through into Indian import prices in the short run and even higher pass-through in the long run, indicating the inertial effect of rising prices. There is also evidence of non-linearity in exchange rate pass-through, in terms of whether the rupee is appreciating or depreciating, as well as in terms of whether there are small or large changes in the rupee value. [ABSTRACT FROM AUTHOR]

This study departs from the previous literature on purchasing power parity ( PPP) by proposing a demand system based methodology for calculating the PPP that takes account of consumer preferences and allows for the substitution effect of price changes. The methodology is used to calculate the PPP between the Indian Rupee and the Vietnamese Dong. The study allows for regional variation in preferences and price changes both inside the country and between countries. It proposes and applies a methodology for constructing prices from unit values after adjusting them for quality and demographic effects. The adjusted unit values are used as prices in the demand estimations, and the demand parameter estimates are used to calculate both spatial prices within each country and the PPP between the two countries within a consistent framework. The study illustrates the usefulness of preference consistent methods to calculate the PPP by applying the PPPs to compare living standards between India and Vietnam. The significance of the results follows from the fact that the levels of living comparisons are quite sensitive to the PPP used in converting the Rupee expenditure into Vietnamese Dong. The present results on food PPPs question the relevance of the PPPs from the ICP project in cross-country welfare comparisons especially in a period of high food inflation. [ABSTRACT FROM AUTHOR]

The adoption of inflation targeting in India has been a much debated topic which also becomes a challenge for an emerging economy. Though inflation targeting has already been adopted in some emerging and advanced countries, successful implementation would be a concern. The paper argues that an emerging country like India needs to consider the composition of consumer price index; state of macro econometric models; and young demographics, unemployment rate and lack of social security before adopting inflation targeting. To modernize the monetary policy framework, India could consider introducing regular review of the regional economy; instituting a monetary policy committee; and separating debt from monetary management, the paper argues. [ABSTRACT FROM PUBLISHER]

India and Bangladesh share a common historical background, geographical proximity, institutional similarities and a policy shift towards economic liberalization since the early 1990s. Inflation between these countries, however, often remains remarkably different, and the series of inflation differential between them does not follow any consistent pattern over time, suggesting an intriguing area of investigation. Working over the 1979–2010 period, this study finds support in favour of the Friedman hypothesis of the primacy of money supply in determining inflation in a country after accounting for supply shocks. In an autoregressive distributed lag model, this work shows that Bangladesh experienced higher inflation than India whenever Bangladesh’s money supply grew faster than India’s. The same is true for India as well, suggesting that both central banks must maintain their restrained stance in money supply if they need to lower inflation. [ABSTRACT FROM PUBLISHER]

This article estimates the welfare cost of inflation in India using the time-varying interest semi-elasticity from the money demand schedule. The estimated interest semi-elasticity and the welfare cost of inflation for India show variation over time. The result suggests increasing welfare cost of inflation for Indian economy in recent times. [ABSTRACT FROM AUTHOR]

This paper computes several statistical measures for core inflation for India and provides methodology of construction of these core measures. Some of these have been computed for the first time for India, such as: persistence weighted, variations of ‘Neo-Edgeworthian Index’, asymmetric trimmed mean, and month-by‐month exclusion (dynamic trimmed mean) core measures. For computing these core measures, the study uses both aggregate WPI and a detailed breakdown of the WPI. It covers the period April 1994–April 2009, with 1993–1994 as the base year. Subsequently, a comparison of these estimated core measures based on the criteria of usefulness of a measure of core inflation from a monetary policy point of view is carried out. The study finds only some representative measures of core inflation to be useful. [ABSTRACT FROM AUTHOR]

The paper attempts to examine whether there is price convergence across various regions in India. Using panel unit root tests that are robust to cross-sectional dependence, it is found that relative price levels among various regions in India are mean-reverting. Further, we decompose each series into a set of common factors and idiosyncratic components. The decomposition enables us to test stationarity and estimate half-lives of the common factors and the idiosyncratic components separately. Both these components are found to be stationary. Idiosyncratic price shocks, however, are found to be more persistent as compared to the common factor. Results also indicate that transportation cost proxied by distance can explain a part of the variation in prices between two locations in India. [ABSTRACT FROM AUTHOR]