Global financial crisis of 2008 which marked its 10th anniversary recently has intensified the problem of fiscal deficit and inflation which happen to be the two foremost macroeconomic challenges confronting the Indian economy. In the light of unsettled debate pertaining to the inflationary tendencies of fiscal deficit, the present study attempts to empirically examine the important macroeconomic determinants of inflation in India and investigates whether the proposition of a positive effect of fiscal deficits on inflation can be verified in the particular case of the Indian economy using quarterly data from Q1: 1996–1997 to Q1: 2016-2017. The ARDL Bounds approach to cointegration reveals the existence of long-run relationship between inflation; gross fiscal deficit; money supply; exchange rate; crude oil prices; and output gap. The long-run and short-run dynamics indicate that gross fiscal deficit and money supply generate negative impact on inflation in India. From the supply side, crude oil prices and exchange rate are found to be playing an important role in determining domestic prices. From the demand side, in the absence of a stronger output-inflation relationship, the support for flexible inflation targeting framework does get encumbered as the case for the existence of Phillips curve in India further weakens through our analysis. This result bears significance especially in the context of a switch to a rule based anti-inflationary strategy in India.
AgheveliB. B. & KhanM. (1978). Government deficits and the inflationary process in developing countries. IMF Staff Papers, 25(3), 383.
2.
AlamM. Q. & AlamM. S. (2016). The Determinants of Inflation in India: The Bounds Test Analysis. International Journal of Economics and Financial Issues, 6(2), 544–550.
AshraS.ChattopadhyayS. & ChaudhuriK. (2004). Deficit, money and price: The Indian experience. Journal of Policy Modeling, 26(3), 289–299.
5.
AshwaniD. (2014). Determinants of inflation in India: A cointegration approach. International Journal of Multidisciplinary Consortium, 1(1), 1–11.
6.
AuduN. P. & AmaegberiM. (2013). Exchange rate fluctuations and inflation targeting in an open economy: Econometrics approach. European Journal of Accounting, Auditing and Finance Research, 1(3), 24–42.
7.
BaiJ. & PerronP. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18(1), 1–22.
8.
BenesM. J.ClintonK.GeorgeA.JohnJ.KamenikO.LaxtonM. D. … WangH. (2017). Inflation-forecast targeting for India: An outline of the analytical framework. Washington, DC: International Monetary Fund.
9.
BhattacharyaR.PatnaikI. & ShahA. (2008). Exchange rate pass-through in India. Macro/Finance Group at National Institute of Public Finance and Policy. Retrieved from http://macrofinance.nipfp.org.in/PDF/BPS2008_erpt.pdf
10.
BiswasB. & SaundersP. J. (1990). Money and price level in India: An empirical analysis. Indian Economic Journal, 35(1), 103–113.
11.
BorenszteinE.De GregorioJ. & LeeJ. W. (1998). How does foreign direct investment affect economic growth?Journal of International Economics, 45(1), 115–135.
12.
CalvoG. A. & VeghC. A. (1999). Inflation stabilization and bop crisis in developing countries. In TaylorJ. B. & WoodfordM. (Eds.), Handbook of macroeconomics (Vol. C, pp. 1531–1614). Amsterdam, North Holland: Elsevier.
13.
ChakrabortyL. & VarmaK. O. (2018). Fiscal reforms, deficits and inflation determination: Empirical evidence from India. Prajnan, 46(4), 353–371.
14.
CunadoJ. & De GraciaF. P. (2005). Oil prices, economic activity and inflation: Evidence for some Asian countries. The Quarterly Review of Economics and Finance, 45(1), 65–83.
15.
EkongC. N. & EffiongE. L. (2015). Oil price shocks and Nigeria’s macroeconomy: Disentangling the dynamics of crude oil market shocks. Global Business Review, 16(6), 920–935.
16.
FriedmanM. (1963). Inflation: Causes and consequences. New York, NY: Asia Publishing House.
17.
FriedmanM. (1992). Money mischief: Episodes in monetary history. New York, NY: Harcourt Brace Jovanovich.
18.
GhoshS. & KanjilalK. (2014). Oil price shocks on Indian economy: Evidence from Toda Yamamoto and Markov regime-switching VAR. Macroeconomics and Finance in Emerging Market Economies, 7(1), 122–139.
19.
GottschalkJ.KalonjiK. D. & MiyajimaK. (2008). Analyzing determinants of inflation when there are data limitation: The case of Sierra Leone (No. 2008-2271). Washington, DC: International Monetary Fund.
20.
Government of India (GOI) (2017). Annual report 2016–17. New Delhi: Ministry of Statistics and Programme implementation.
21.
GuptaG. S. (1984). Monetary target setting. Ahmedabad, India: Indian Institute of Management.
22.
HonohanP. & LaneP. R. (2003). Divergent inflation rates in EMU. Economic Policy, 37, 359–394.
23.
HonohanP. & LaneP. R. (2004). Exchange rates and inflation in EMU: An update (CEPR Discussion Paper No. 4583). Institute for International Integration Studies, Trinity College Dublin, Ireland.
24.
JadhavN. (1994). Monetary economics for India. Delhi: Macmillan India Limited.
25.
KahnB. (2009). Challenges of inflation targeting for emerging-market economies: The South African case. Challenges for Monetary Policy-makers in Emerging Markets. South African Reserve Bank Conference Series, 123–150.
26.
KaurG. (2017). The relationship between fiscal deficit and inflation in India: A cointegration analysis. Journal of Business Thought, 8, 24–41.
27.
KhumaloJ. (2013). Budget deficit-inflation nexus in South Africa: VAR analysis. Mediterranean Journal of Social Sciences, 4(14), 725.
28.
KhundrakpamJ. K. & GoyalR. (2008). Is the government deficit for India still relevant for stabilization?RBI Occasional Papers, 29(3), 1–21.
29.
KhundrakpamJ. K. & PattanaikS. (2010). Fiscal stimulus and potential inflationary risks: An empirical assessment of fiscal deficit and inflation relationship in India. Journal of Economic Integration, 25(4), 703–721.
30.
KulkarniK. G. & SaxenaS. C. (2003). Have the monetary and fiscal policies been effective in India?Global Business Review, 4(2), 229–237.
31.
LaurencesonJ. & ChaiJ. (2003). Financial reform and economic development in China. Cheltenham, UK: Edward Elgar.
32.
MacKinnonJ. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601–618.
33.
MakochekanwaA. (2011). Impact of budget deficit on inflation in Zimbabwe. The Economic Research Guardian, 1(2), 49–59.
34.
MiloP. (2012). The impact of the budget deficit on the currency and inflation in the transition economies. Journal of Central Banking Theory and Practice, 1(1), 25–57.
35.
MishkinF. S. (2011). Monetary policy strategy: Lessons from the crisis (NBER Working Paper No. 16755). Cambridge, MA: National Bureau of Economic Research.
36.
MohantyD. (2010, January). Measures of Inflation in India: Issues and Perspectives. In IARNIW Conference Speech, Thiruvananthapuram.
37.
MohantyD. & JohnJ. (2015). Determinants of inflation in India. Journal of Asian Economics, 36(C), 86–96.
38.
MohantyM. S. & KlauM. (2001). What determines inflation in emerging market economies?BIS Papers, 8, 1–38.
39.
NachaneD. M. & NadkarniR. M. (1985). Empirical tests of certain monetarist propositions via causality theory. Indian Economic Journal, 33, 139–155.
40.
NguyenV. B. (2015). Effects of fiscal deficit and money M2 supply on inflation: Evidence from selected economies of Asia. Journal of Economics, Finance and Administrative Science, 20(38), 49–53.
41.
OECD (2017). M. E. I. Historical Statistics, OECD.Stat, (database). Retrieved from https://www.oecd-ilibrary.org/economics/data/main-economic-indicators_mei-data-en
42.
PaulB. P. (2009). In search of the Phillips curve for India. Journal of Asian Economics, 20(4), 479–488.
43.
PesaranM. H. & PesaranB. (1997). Working with Microfit 4.0: Interactive econometric analysis. Oxford: Oxford University Press.
44.
PesaranM. H.ShinY. & SmithR. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.
45.
RajJ.DhalS. & JainR. (2008). Imported inflation: The evidence from India. Reserve Bank of India Occasional Papers, 29(3), 69–117.
46.
RamachandraV. S. (1983). Direction of causality between monetary and real variables in India—An empirical result. Indian Economic Journal, 31(1), 65–76.
47.
RamachandraV. S. (1986). Direction of causality between monetary and real variables in India—An extended result. Indian Economic Journal, 34(1), 98–102.
48.
RangarajanC. & MohantyM. S. (1998). Fiscal deficit, external balance and monetary growth. RBI Occasional Papers, 18, 635–653.
49.
Reserve Bank of India (RBI) (1998). Report of the working group on money supply: Analytics and methodology of compilation. Mumbai: RBI.
50.
Reserve Bank of India (RBI) (2012). Fiscal and monetary coordination. Report on Currency and Finance 2009–2012. Mumbai: RBI.
51.
Reserve Bank of India (RBI) (2014). Report of the expert committee to revise and strengthen the monetary policy framework. Mumbai: RBI.
52.
Reserve Bank of India (RBI) (2017). Handbook of statistics of the Indian economy, 2016–17. Mumbai: RBI. Retrieved from https://dbie.rbi.org.in
53.
RondinaF. (2017). The impact of oil price changes in a New Keynesian model of the US Economy. Department of Economics, University of Ottawa, Ontario, Canada
54.
SargentT. J. & WallaceN. (1981). Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis, Quarterly Review, 5(3), 1–17.
55.
SarmaY. S. R. (1982). Government deficits, money supply and inflation in India. Reserve Bank of India Occasional Papers, Mumbai, 3(1), 56–67.
56.
SekS. K.TeoX. Q. & WongY. N. (2015). A comparative study on the effects of oil price changes on inflation. Procedia Economics and Finance, 26(15), 630–636.
SuleimanW. A. (2005). The impact of investment and financial intermediation on economic growth: New evidence from Jordan. Abstract mimeo.
59.
SvenssonL. E. (2002). Inflation targeting: Should it be modeled as an instrument rule or a targeting rule?European Economic Review, 46(4–5), 771–780.
60.
SvenssonL. E. (2011). Monetary policy after the crisis. Speech at the Federal Reserve Bank of San Francisco, November29, 2011. Retrieved from https://www.frbsf.org/economic-research/files/Svensson2.pdf.
61.
ThorntonD. L. (1990). Do government deficits matter?Federal Reserve Bank of St. Louis Review, 72, 25–39.
62.
TiwariA. K.OrosC. & AlbulescuC. T. (2014). Revisiting the inflation–output gap relationship for France using a wavelet transform approach. Economic Modelling, 37, 464–475.
63.
TiwariA. K. & ShahbazM. (2013). Modelling the relationship between whole sale price and consumer price indices: Cointegration and causality analysis for India. Global Business Review, 14(3), 397–411.
64.
TiwariA. K. & TiwariA. P. (2011). Fiscal deficit and inflation: An empirical analysis for India. The Romanian Economic Journal, 14(42), 131–158.
65.
TiwariA.TiwariA. & PandeyP. (2012). Fiscal deficit and inflation: What causes what? The case of India. Journal of International Business and Economy, 13(1), 57–81.
66.
VogelsangT. J. (1993). Essays on testing for non-stationarities and structural change in time series models (Unpublished Ph.D. dissertation). Princeton University, Princeton, NJ.
67.
WalshC. E. (2003). Monetary theory and policy. Cambridge, MA: MIT Press.
68.
WeidnerJ. & WilliamsJ. (2009). How big is the output gap?Federal Reserve Board of San Francisco Economic Letter, June12, Number 2009–19.
69.
WoodfordM. (2001). Fiscal requirements for price stability. Journal of Money, Credit and Banking, 33(3), 669–728.
