Propagation Mechanisms in Inflation: Governance as key
Goyal, Ashima (2012): Propagation Mechanisms in Inflation: Governance as key. Published in: India Development Report 2012 (June 2012): pp. 32-46.
Resurgence in Indian inflation since 2007 was associated with sharp food and oil price inflation. Propagation mechanisms that allow these relative prices to affect aggregate prices include governance failures, the effect of food prices on wages, exchange rates on costs and the response to cost shocks in firm price-setting. The paper analyzes these mechanisms. Supply shocks took the form of upward shifts of an aggregate supply elastic in the sense costs did not rise with output. First round effects have to be allowed since of asymmetric price adjustment. Estimations show it was multiple supply shocks rather than persistent second round price effects that caused inflation. Output remained below potential. In such a structure, the best policies are those that reduce average production costs. Policy induced demand tightening to anchor inflationary expectations and prevent a wage-price spiral that could shift up costs imposed a large output sacrifice. Policy contraction generally exceeded the fall in output. A large negative demand impulse over 2010-12 constrained growth more than inflation. The analysis provides a new understanding of how supply constraints affect the economy
inflation, propagation, aggregate supply, relative price shocks, governance
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development
ashima goyal
Basu, K. 2011.'Understanding Inflation and Controlling It', Economic and Political Weekly, 46(41): 50-64. October.
Bicchal, M., N. Kumar, and B. Kamaiah. 2012. 'Different Statistical Core Inflation Measures for India: Construction and Evaluation'. DOI:10.1080/17520843.2012.682339. Macroeconomics and Finance in Emerging Market Economies, forthcoming. Accessed on March 2012. Available at http://www.tandfonline.com/doi/abs/10.1080/17520843.2012.682339
Gali, Jordi. 2008. Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton and Oxford: Princeton University Press.
Gokarn, S. 2011. 'The Price of Protein', Macroeconomics and Finance in Emerging Market Economies, 4(2):327-335.
GOI(Government of India). 2012. Economic Survey 2011-12. Accessed from http://indiabudget.nic.in on April 10th, 2012.
GOI(Government of India). 2011. Economic Survey 2010-11. Accessed from http://indiabudget.nic.in on March 30th, 2011.
Goyal, A. 2010. 'Inflationary Pressures in South Asia', Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), 17(2): 1-42, December.
Goyal, A. 2011a. 'A General Equilibrium Open Economy Model for Emerging Markets: Monetary Policy with a Dualistic Labor Market', Economic Modelling, Elsevier, 28(3): 1392-1404, May.
Goyal, A. 2011b.'Sustainable Debt and Deficits in Emerging Markets', International Journal of Trade and Global Markets, 4(2): 113-136.
Goyal, A. 2008. 'Incentives from Exchange Rate Regimes in an Institutional Context', Journal of Quantitative Economics, 6(1 & 2): 101-121, January & July.
Goyal, A. and S. Arora. 2012. 'Deriving India's Potential Growth from Theory and Structure'. IGIDR working paper no. WP-2012-018. Accessed in March 2012. Available at http://www.igidr.ac.in/pdf/publication/WP-2012-018.pdf.
Goyal, A. and S. Tripathi. 2011. 'New Keynesian Aggregate Supply in the Tropics: Food Prices, Wages and Inflation', International Journal of Monetary Economics and Finance, 4(4): 330-354, January.
IMF (International Monetary Fund). 2011. 'Asia and Pacific: Navigating an Uncertain Global Environment While Building Inclusive Growth'. Regional Economic Outlook. October. Accessed in March 2012. Available at http://www.imf.org/external/pubs/ft/reo/2011/apd/eng/areo1011.pdf.
Jha, R. and T.N. Dang. 2012. 'Inflation Variability and the Relationship Between Inflation and Growth', Macroeconomics and Finance in Emerging Market Economies, 5(1): 3-17, March.
Krishnan, R. and R. R. Vaidya. 2012. 'Is Fiscal Policy in India Pro-cyclical?', Chapter 5 in S. Mahendra Dev (ed.), India Development Report. pp. 59-78. New Delhi: IGIDR and Oxford University Press.
RBI (Reserve Bank of India). 2011. Annual Report 2010-11. Accessed in March 2012. Available at http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0RBIAN250811_F.pdf.
Tripathi, S. 2012. 'Dynamics of Oil Prices in Emerging Market Economies', Unpublished Ph.D. thesis. Mumbai: Indira Gandhi Institute of Development Research.
Tripathi, S. and A. Goyal. 2011. 'Relative Prices, the Price Level and Inflation: Effects of Asymmetric and Sticky Adjustment', Indira Gandhi Institute of Development Research, Mumbai Working Paper 2011-026.