© 2010 International Monetary Fund WP/
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Inflation Expectations and Monetary Policy in India: An Empirical Exploration Prepared by Michael Debabrata Patra and Partha Ray
Authorized for distribution by Arvind Virmani March 2010
JEL Classification Numbers: E 31, E 52 Keywords: Inflation, Inflation Expectation, India, Monetary Policy Author
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The authors are indebted to Dr. Duvvuri Subbarao for his valuable reactions to an earlier draft of the paper. They are also grateful to Christopher Crowe, Roberto Guimaraes and Kalpana Kochhar for their comments. The views expressed in the paper are attributable to the authors only; all other usual disclaimers apply.
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.
This paper pursues a computationally intensive approach to generate future inflation, followed by an exploration of the determinants of inflation expectations by estimating a new Keynesian type Phillips curve that takes into account country-specific characteristics, the stance of monetary and fiscal policies, marginal costs and exogenous supply shocks. The empirical results indicate that high and climbing inflation could easily seep into people’s anticipation of future inflation and linger. There is a reputational bonus for monetary policy to act against inflation now rather than going for cold turkey when societal compulsions reach a critical mass.