OPENNESS AND INFLATION: EMPIRICAL EVIDENCE FROM INDIA
- Publisher: Journal Of Business Management & Social Sciences Research
Journal Of Business Management & Social Sciences Research
(issn: 2319-5614, eissn: 2319-5614)
Business management, Department of Economics | Inflation, Openness, Cointegration, Granger Causality, Variance Decomposition
The paper examines the effects of openness on inflation in India. Monthly data from April2004 to December2013 have been used for this purpose. Johansens cointegration approach has been employed to establish the long run (equilibrium) relationship between inflation and openness considering key macroeconomic variables. Empirical results show that a cointegrating relationship among inflation, openness, money supply, interest rate, crude oil price and exchange rate exists. Generalized Forecast Error Variance Decompositions (GFEVD) suggest that openness is the most important determinant of inflation in India after crude oil price. The error correction model (ECM) based Granger causality test confirms strong causality running from openness, money supply, interest rate, crude oil price and exchange rate to inflation. The study concludes that gains from openness do not accrue without the cost in terms of inflation. Openness has contributed significantly in both inflation and its volatility.