The IUP Journal of Applied Economics
The Impact of External and Internal Market Forces on Inflation in India: An Empirical Investigation

Article Details
Pub. Date : Apr, 2019
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE21904
Author Name : Rajesh Sharma, Pradeep Kautish and D Suresh Kumar
Availability : YES
Subject/Domain : Economics
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No. of Pages : 19

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Abstract

The identification of external and internal determinants of inflation is a perplexing task. Moreover, the spillover impact of these determinants generates indecisiveness in measurement. Therefore, the present paper tries to identify the impact of external and internal determinants of inflation in India by using the time series data from 1978 to 2015. In order to assess the short-run and long-run impact of selected variables, an Autoregressive Distributed Lag (ARDL) bounds approach has been adopted. The ARDL bounds method allows investigating the impact of external and internal determinants on inflation in India and provides long-run stability in the system. The results of the study found that oil consumption has a direct impact on domestic prices. Similarly, due to the increase in employment, inflation tends to increase in the long run. Further, the relationship between deficit financing and the domestic price is found to be negative and significant, whereas the impact of Foreign Direct Investment (FDI) on domestic price is found to be inconclusive in the long run.


Description

After liberalization, privatization and globalization, the socioeconomic and international convergence made macroeconomic environment challenging for the policy makers in India. As a result, the country experienced persistent price volatility over the years. Besides, the exogenous factors such as oil price, exchange rate, international collaborations, etc. made the environment strangulated (Ghosh and Phillips, 1998). The cumulative impact of indigenous determinants such as interest rate, demand output gap, etc. contributed to increasing the prices (Maitra, 2016). Apparently, there is no unique explanation for this global phenomenon. However, Friedman and Schwartz (1963) in their seminal work perceived that inflation is a monetary phenomenon and an increase in money supply has a positive influence on the price rise, especially at the time of emergencies such as war.

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