Nilgiri
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IMF Reference paper, please use it as needed in debating with those that say India low inflation is due to "luck" from commodity price crash etc. Feel free to read the whole paper like me, but I have posted the conclusion here as a summary for your convenience:
http://www.imf.org/external/pubs/ft/wp/2016/wp16166.pdf
CONCLUSIONS AND POLICY IMPLICATIONS
Over the last decade, inflation has emerged as a primary concern for India’s policymakers. Worries grew as the inflation rate rose since 2006 and remained elevated and sticky at around the 9% level between 2006 and 2013. The inflation rate, however, has fallen dramatically since then. After peaking at 12.1% year-on-year growth in November 2013, headline CPI inflation collapsed to 4.3% in December 2014 and has averaged less than 5% in 2015. This paper analyzes the dramatic decline in inflation, and quantifies the contribution of different factors in explaining the disinflation process.
We estimate an augmented Phillips Curve for India and use it to quantify the extent to which different factors were responsible for the disinflation between 2013/14 and 2014/15. Our main findings are described as follows:
20% of the disinflation can be explained by a sharp decline in the growth of the “discretionary” component of MSPs.
- The bulk of the disinflation (45%), however, can be attributed to a moderation in the historical dynamics of inflation that influence contemporaneous inflation. This moderation is likely reflecting a softening of backward looking (adaptive) expectations as well as capturing the institutional process of wage and MSP setting that amplifies the effects of shocks and leads to persistence in inflation.
- We also find an important role for forward-looking expectations. Almost 35% of the disinflation can be attributed to this. That said, forward-looking expectations could capture both the effects of the new monetary policy regime announced in the first quarter of 2014, but may also be reflecting more benign future expectations of oil and commodities, that may have translated into wage and price setting behavior.
- Finally, we find that the role of global factors, namely global crude prices and exchange rates, in explaining the disinflation between 2013/14 and 2014/15 is less than 15%, though the contribution of global factors rises if we choose alternative time periods.
- Finally, output gaps are estimated to have closed during this period, and hence the business cycle was actually putting upward pressure on inflation at that time.
There seems a general perception that India’s disinflation has been achieved mainly at the altar of good luck due to the collapse in global commodity prices, or through a sacrifice in domestic growth emanating from a sharp fall in domestic demand. Our empirical analysis, however, finds that these factors do not explain the bulk of the disinflation between 2013/14 and 2014/15. Instead, our findings suggest that the evolution of inflation is a complex mix of the state of the business cycle, inflation expectations, institutional structures and global factors. What we essentially find is that exogenous shocks to inflation – from lower discretionary component of MSPs, a new monetary regime, global commodities – were perpetuated through backward looking expectations and domestic institutional structures that amplified the influence of the original shocks.
@PARIKRAMA @anant_s @Abingdonboy @ranjeet @Ryuzaki @kadamba-warrior @proud_indian @farhan_9909 @Bilal9
et al
http://www.imf.org/external/pubs/ft/wp/2016/wp16166.pdf
CONCLUSIONS AND POLICY IMPLICATIONS
Over the last decade, inflation has emerged as a primary concern for India’s policymakers. Worries grew as the inflation rate rose since 2006 and remained elevated and sticky at around the 9% level between 2006 and 2013. The inflation rate, however, has fallen dramatically since then. After peaking at 12.1% year-on-year growth in November 2013, headline CPI inflation collapsed to 4.3% in December 2014 and has averaged less than 5% in 2015. This paper analyzes the dramatic decline in inflation, and quantifies the contribution of different factors in explaining the disinflation process.
We estimate an augmented Phillips Curve for India and use it to quantify the extent to which different factors were responsible for the disinflation between 2013/14 and 2014/15. Our main findings are described as follows:
20% of the disinflation can be explained by a sharp decline in the growth of the “discretionary” component of MSPs.
- The bulk of the disinflation (45%), however, can be attributed to a moderation in the historical dynamics of inflation that influence contemporaneous inflation. This moderation is likely reflecting a softening of backward looking (adaptive) expectations as well as capturing the institutional process of wage and MSP setting that amplifies the effects of shocks and leads to persistence in inflation.
- We also find an important role for forward-looking expectations. Almost 35% of the disinflation can be attributed to this. That said, forward-looking expectations could capture both the effects of the new monetary policy regime announced in the first quarter of 2014, but may also be reflecting more benign future expectations of oil and commodities, that may have translated into wage and price setting behavior.
- Finally, we find that the role of global factors, namely global crude prices and exchange rates, in explaining the disinflation between 2013/14 and 2014/15 is less than 15%, though the contribution of global factors rises if we choose alternative time periods.
- Finally, output gaps are estimated to have closed during this period, and hence the business cycle was actually putting upward pressure on inflation at that time.
There seems a general perception that India’s disinflation has been achieved mainly at the altar of good luck due to the collapse in global commodity prices, or through a sacrifice in domestic growth emanating from a sharp fall in domestic demand. Our empirical analysis, however, finds that these factors do not explain the bulk of the disinflation between 2013/14 and 2014/15. Instead, our findings suggest that the evolution of inflation is a complex mix of the state of the business cycle, inflation expectations, institutional structures and global factors. What we essentially find is that exogenous shocks to inflation – from lower discretionary component of MSPs, a new monetary regime, global commodities – were perpetuated through backward looking expectations and domestic institutional structures that amplified the influence of the original shocks.
@PARIKRAMA @anant_s @Abingdonboy @ranjeet @Ryuzaki @kadamba-warrior @proud_indian @farhan_9909 @Bilal9
et al
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