Inflation and inflation-uncertainty in India: the policy implications of the relationship

Abstract

Purpose – Inflation and its related uncertainty can impose costs on real economic output in any economy. This paper aims to analyze the relationship between inflation and inflation uncertainty in India. Design/methodology/approach – The methodology uses a generalized autoregressive conditional heteroscedasticity (GARCH) model and Granger Causality test. Findings – Initial estimates show the inflation rate to be a stationary process. The maximum likelihood estimates from the GARCH model reveal strong support for the presence of a positive relationship between the level of inflation and its uncertainty. The Granger causality results indicate a feedback between inflation and uncertainty. Research limitations/implications – The research results have important implication for policy makers and especially the Reserve Bank of India. Practical implications – It provides strong support to the notion of an opportunistic central bank in India. Originality/value – The results of the paper are of relevance not only to the monetary policy makers but also to academicians in India and other developing countries.