NO : WP-2017-007
AUTHOR :Taniya Ghosh, Sohini Sahu, Siddhartha Chattopadhyay
TITLE : Households’ Inflation Expectations in India: Role of Economic Policy Uncertainty and Global Financial Uncertainty Spill-over
Inflation expectations are an important marker for the conduct of monetary policy. Using a Bayesian structural VAR-X model that includes the inflation expectations of general public based on the Inflation Expectations Survey of Households (IESH), in a first of its kind of study using this dataset, we analyze the macroeconomic factors that determine inflation expectations in India with special focus on economic uncertainty. Besides the standard macroeconomic factors like real output, inflation rate and monetary policy, we also include economic policy uncertainty as a possible endogenous variable in our model that influences inflation expectations, while international financial volatility that has spill-over effects is an exogenous variable. Using non-recursive identification strategy, we find that economic policy uncertainty has considerable effects on households’ expectations of inflation and in a longer horizon the international financial volatility also matters. Additionally, in presence of inflation expectations and economic policy uncertainty, we find that the monetary policy shock causes output and inflation to fall significantly; thereby solving the “price puzzle” that otherwise exists in the monetary transmission mechanism literature for India.
Keywords : BVAR, Inflation Expectations, Economic Policy Uncertainty, Price Puzzle
JEL Code : E41, E52, E58
Weblink : http://www.igidr.ac.in/pdf/publication/WP-2017-007.pdf