Does Inflation Slow Long-Run Growth in India?

Abstract

This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989-2013, and use the cross-sectionally augmented distributed lag (CSDL)approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation — to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5percent. This suggest the need for the Reserve Bank of India to balance the short-term growth inflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation.

Keywords: Inflation, India, Economic growth, Consumer price indexes, Time series, Panel analysis, threshold effects, cross-sectional heterogeneity and dependence., inflation rate, economics, money, monetary policy, variables, gdp, lags, inflation rates, growth rate, cd, trade, real gdp, theory, economic theory, phillips curve, econometrics, macroeconomics, human capital, monetary fund, value, marginal product, wholesale price index, adverse effect, taxation, expectations, development economics, reserve bank, oil price, demand for money, unemployment, wages, debt, guarantee, interest, monetary policies, deflation, economic surveys, disinflation, demand-side factors, transactions costs, utility, payment

JEL Classification: C23, E31, O40