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

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.

The methodology uses a generalized autoregressive conditional heteroscedasticity (GARCH) model and Granger Causality test.

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.

The research results have important implication for policy makers and especially the Reserve Bank of India.

It provides strong support to the notion of an opportunistic central bank in India.

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.