Speed of adjustment and inflation-output trade off in India
Abstract
This paper estimates the short-run aggregate supply curve for the Indian
economy over the period 1950-51 to 2008-09. Methodological improvements in
this paper include the technique of estimating adaptive expectations, constrained
estimation consistent with long run equilibrium, and introduction of the extended
Phillips curve. The study also attempts to investigate the question of speed of
recovery and the choice of adjustment paths available to policymakers in face of
adverse supply shocks. Contrary to previous studies, the present study finds a
regular tradeoff between inflation and output or unemployment with inflationary
expectations based on the experience of past three to four years. We also find
that the subtle tradeoff between the rate of output recovery and inflation is
negative in India thereby implying that a strategy of fast recovery is not likely to
result in high inflationary pressures.
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