The present study investigates the dynamics of inflation, GDP and
exchange rate and money supply in India for the period 1975-2012. The
data source is cumulated from the Reserve Bank of India (RBI) Handbook
of Statistics 2012. The empirical findings of the study show that there
is a long-run equilibrium relationship exist among the variables. The
result also suggest that money supply has a positive effect on GDP
growth in India. The result of error correction indicates that correct
and negative sign for Gross Domestic Product and exchange rate. The
behavior of GDP implies there is no problem of adjustment in the long
run in case of shocks in the short run. The VECM Granger causality
confirms that unidirectional causality from GDP to inflation and
exchange rate to inflation. The result also found that exchange rate
Granger causes both GDP and money supply at 10 percent level of
significance. The impulse response result shows that GDP has a positive
response to money supply from the occurrence to the end of the period.
Whereas the response of exchange rate to money supply negative in the
whole lag period. The variance decomposition result explainss that no
significant part of variance is caused by money supply. The result also
reveals that cyclical variance of GDP caused by money supply, exchange
rate, and inflation.
This study is one of very few studies which has investigated the growth
inflation relationship in the context of India in a new approach using
Inflation, Economic growth, Cointegration, Vector error correction, Causality, India.
Andres, J. and Ignacio, 1999. Dose inflation harm economic growth? Evidence from the OECD. University of Chicago. pp: 315-348.
Barro, J.R., 1995. Inflation and economic growth (No. w5326). National bureau of economic research.
Behera, J., 2014a. Inflation and its impact on economic growth: Evidence from six South Asian countries. Journal of Economics and Sustainable Development, 5(7): 145-154.
Behera, J., 2014b. Inflation and economic growth in seven South Asian countries: Evidence from panel data analysis. EPRA International Journal of Economics and Business Review, 2(6): 15-20.
Behera, J. and A.K. Mishra, 2016. Inflation and economic growth nexus in BRICS: Evidence from ARDL bound testing approach. Asian Journal of Economic Modelling, 4(1): 1-17. View at Google Scholar | View at Publisher
Bhaduri, N.S., 2013. Revisiting the growth inflation nexus: A wavelet analysis. Working 77, Madras School of Economics, Chennai 600 025, India.
Boyd, 2001. The impact of inflation on financial sector performance. Carlson school of management, University of Minnesota, MN 55455, USA Department of Economics, University of Texas, Austin, TX 78712, USA.
Dickey, D.A. and W.A. Fuller, 1981. The likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(9): 1057-1072. View at Google Scholar
Eaboyka, E. and H.A. Okuyan, 2008. Does inflation depress economic growth? Evidence from Turkey. International Research Journal of Finance and Economics, 13(17): 40-48. View at Google Scholar
Fischer, S., 1993. The role of macroeconomic factor in growth. Journal of Monetary Economics, 32(3): 485-512. View at Google Scholar
Gokul and S. Hanif, 2004. Relationship between inflation and economic growth. Working Paper No 2004/04, Economics Department. Reserve Bank of Fiji.
Gylfason, 2001. Dose inflation matters for growth? University of ice land, center for business and policy studies. Stockholm, Sweden: CEPR. Institute of Economic Studies.
Khan, M.S. and A.S. Senhadji, 2001. Threshold effects in the relationship between inflation and growth. IMF Staff Papers, 48(1): 1-21. View at Google Scholar
Mashiri, S. and A. Sepehri, 2004. Inflation growth profiles across countries: Evidence from developing and developed countries. International Review of Applied Economics, 18(2): 191-207.
Phillips, A.W., 1958. The relationship between unempolyment and the rate of change of money wages in the United Kingdom, 1861-1957. Economica, 25(100): 283-299. View at Google Scholar | View at Publisher
Saaed, A., 2007. Inflation and economic growth in Kuwait: 1985-2008- Evidence from co-inetgration and error correction model. Applied Econometrics and International Development, 7(1): 143-155. View at Google Scholar
Sarel, M., 1995. Non-linear effects of inflation on economic growth. IMF Working Paper WP/95/96, Research Department.
Shitundu, J.L. and E.G. Luvarda, 2000. The effects of inflation and economic growth in Tanzania. African Journal of Finance and Management, 9(1): 70-77. View at Publisher
This study received no specific financial support.
The author declares that there are no conflicts of interests regarding the publication of this paper.