Inflation Persistence in India

The primary objective of this paper is to measure persistence in overall inflation measured by WPI and CPI-IW and their components for the Indian economy over the period 1996:4 to 2017:02. The study first tests for persistence and then quantifies it using various univariate and multivariate approach. The univariate approach estimates persistence using sum of autoregressive coefficient, largest root of the autoregressive process, spectral measures such as Campbell and Mankiw measure of persistence and spectral density function at frequency zero. Estimates of persistence are also derived using variance ratio tests and rolling regressions technique. The study also uses long memory approach (ARFIMA) to measure persistence. In a multivariate approach, the study examines structural form of persistence by employing a time varying vector autoregressive model (TVP-VAR) with stochastic volatility, incorporating inflation, interest rate, demand and supply side variables as its constituents. Results of the study suggest that persistence is high in the economy at both aggregate and disaggregate level. Wholesale price inflation shows intermediate memory, however Consumer prices exhibit long-memory in a univariate analysis. However when structural persistence is studied then WPI inflation is affected by exchange rate shocks and supply shocks such as fuel but it is found to be invariant with respect to interest rate shocks. On the other hand, CPI-IW inflation exhibits time variation with respect to food shocks and exchange rate shocks but is found to be mostly invariant with respect to interest rate shocks.