What Causes India’s High Inflation? A Threshold Structural Vector Autoregression Analysis
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Abstract
Inflation is a chronic problem for India since the last few decades. The existence of mild inflation is necessary for the growth of an economy. Mild inflation in the economy always has a positive or neutral effect on the growth rate. When inflation upswings certain level, it affects growth negatively and ultimately affects the other macroeconomic variables such as interest rate, exchange rate, and money supply. That level of inflation is known as a threshold level of inflation. This paper estimates the threshold level of inflation for India from the period of April 2006 to May 2015. The threshold level of inflation is treated as a regime point and the whole sample is divided into two different regimes, from April 2006 to March 2013 and April 2013 to May 2015. This paper also focuses on the interaction of inflation with other macroeconomic variables in two different regimes separately by using the non-linear Structural Vector Autoregression (SVAR) model. We find that high inflation in the economy is the result of shocks in the interest rate, oil price, and Nominal Effective Exchange Rate (NEER) and which ultimately affects the economic growth in India.
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