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    Sectoral effects of disinflation: Evidence from India
    ( 2013-01-01) Durai, S. Raja Sethu ; Ramachandran, M.
    This paper makes an attempt to measure sacrifice ratios for the farm and non-farm sector as disinflation policy is believed to have differential impact on these sectors. Using the non-parametric approach of Ball (1994), five disinflation episodes are identified for India over the period from 1950-51 to 2009-10. These disinflations are largely due to contractionary monetary policy pursued by the Reserve Bank of India. The estimates of the sacrifice ratio and the presence of persistence and hysteresis effects indicate that disinflationary monetary policy is more harmful to output growth in the non-farm sector. In contrast, the negative sacrifice ratio in the farm sector implies that there is output gain during disinflationary periods. This output gain in the farm sector seems to have been driven by those factors which are independent of contractionary monetary shocks. These evidences also suggest that use of aggregate time series data might produce errors in the measurement of sacrifice ratios. © 2013 Copyright Taylor and Francis Group, LLC.
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    Does inflation asymmetrically affect relative price variability?
    ( 2014-01-01) Rather, Sartaj Rasool ; Durai, S. Raja Sethu ; Ramachandran, M.
    The U-shaped relationship between inflation and price dispersion around nonzero inflation rate is due to the use of aggregate measure of relative price variability (RPV), which amounts to specification errors in a piecewise linear regression models. However, the true underlying relationship between inflation and inflation-induced RPV is found to be U-shaped around zero inflation and inflation seems to have asymmetric impact on price dispersion as predicted by menu cost models. © 2013 Taylor & Francis.
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    Inflation and relative price variability: Evidence for India
    ( 2014-02-01) Rather, Sartaj Rasool ; Durai, S. Raja Sethu ; Ramachandran, M.
    This study decomposes relative price variability into a component due to inflation and a component due to real factors. The empirical results for India suggest that real factors account for 55% and inflation accounts for 45% of the variability in relative price changes. The proportion of inflation induced relative price variability increases with the rise in inflation, implying that inflation has distortionary effects on the structure of relative prices. Further, larger part of variability in the relative price changes seems to have been generated by fluctuations in the relative prices of a few commodities. The sector wise analysis shows that the major share of total relative price variability is contributed by fluctuations in the prices of manufactured products. The more crucial inference that emerges from the empirical analysis is that the inflation rate at which variability of relative price changes is minimum is found to be 4.5%, which is consistent with the official threshold rate often claimed by the Reserve Bank of India. © 2014 Elsevier Inc.
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    Asymmetric price adjustment - evidence for India
    ( 2015-11-01) Rather, Sartaj Rasool ; Durai, S. Raja Sethu ; Ramachandran, M.
    This study examines whether there exists asymmetry in the price adjustment of firms, as anticipated by Ball and Mankiw (1994), in an error correction framework. We used monthly time series data on prices of 419 commodities, which constitute 97% of commodity price basket used in the construction of wholesale price index in India. The empirical evidence indicates that the price adjustment of most of the firms exhibits strong asymmetry; shocks that increase firms' desired prices cause quicker and larger rise in prices whereas shocks that lower desired prices cause smaller or no fall in prices. Also, we identify a threshold value for each firm below which it does not allow its relative price to fall. These evidences imply that larger relative price variability can trigger inflation even in the absence of demand shocks. Moreover, the distribution of output is likely to be negatively skewed even if the demand shocks are symmetric.
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    Inflation forecasting and the distribution of price changes
    ( 2015-01-01) Rather, Sartaj Rasool ; Paul, Sunil ; Durai, S. Raja Sethu
    This study shows that replacing the traditional measure of asymmetry that is skewness in the inflation forecasting model with an alternative asymmetry measure that captures the joint influence of both skewness and variance on inflation significantly improves the forecast at various horizons. The empirical evidence suggests that it is more appropriate to use such measure of asymmetry in inflation forecast model as it has edge over simple measure of skewness in predicting inflation. These findings are consistent with the prediction of menu cost model that the variance of cross sectional distribution of relative price changes amplifies the impact of skewness on inflation.