Food Inflation in India: The Role for Monetary Policy

By Rahul Anand, Ding Ding, Volodymyr Tulin

September 24, 2014

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Rahul Anand, Ding Ding, and Volodymyr Tulin. Food Inflation in India: The Role for Monetary Policy, (USA: International Monetary Fund, 2014) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Indian food and fuel inflation has remained high for several years, and second-round effects on core inflation are estimated to be large. This paper estimates the size of second-round effects using an estimated reduced-form general equilibrium model of the Indian economy, which incorporates pass-through from headline inflation to core inflation. The results indicate that India's inflation is highly inertial and persistent. Due to second-round effects, the gap between headline inflation and core inflation decreases by about three fourths within one year as core inflation catches up with headline inflation. Large second-round effects stem from several factors, such as the high share of food in household expenditure and the role of food inflation in informing inflation expectations and wage setting. Analysis suggests that in order to durably reduce the current high inflation, the monetary policy stance needs to remain tight for a considerable length of time. In addition, progress on structural reforms to raise potential growth is critical to reduce the burden on monetary policy.

Subject: Commodity price shocks, Financial services, Foreign exchange, Inflation, Output gap, Prices, Production, Real exchange rates, Real interest rates

Keywords: Commodity price shocks, Food inflation, Forecasting, Fuel inflation pass-through, Global, Headline CPI inflation equation, India, Inflation, Inflation dynamics, Inflation expectation, Interest rate, Monetary policy, Output gap, Real exchange rates, Real interest rates, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/178
Stock No:

WPIEA2014178
ISBN:

9781484392096
ISSN:

1018-5941

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