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Inflation expectations of households in India: Role of oil prices, economic policy uncertainty, and spillover of global financial uncertainty
Author(s) -
Ghosh Taniya,
Sahu Sohini,
Chattopadhyay Siddhartha
Publication year - 2021
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12244
Subject(s) - economics , monetary policy , exchange rate , spillover effect , bayesian vector autoregression , volatility (finance) , monetary economics , inflation (cosmology) , inflation targeting , macroeconomics , econometrics , bayesian probability , physics , artificial intelligence , theoretical physics , computer science
Inflation expectations are an important marker for the conduct of monetary policy. Using a Bayesian structural VAR‐X model we analyze the macroeconomic factors that determine inflation expectations of the general public in India. Besides the standard macroeconomic factors such as output, inflation rate, monetary policy, and exchange rate, we include economic policy uncertainty as an endogenous variable, while international factors such as oil prices and financial volatility that have spill‐over effects are included as exogenous variables. We find that oil prices and the exchange rate have considerable effects on expectations of inflation, and that in a longer horizon, international financial volatility also matters. Our model generates results free from the “price puzzle” and the “exchange rate puzzle” that otherwise exist in the literature on monetary transmission mechanisms for India.