What Causes India’s High Inflation? A Threshold Structural Vector Autoregression Analysis

Abstract

Inflation affects the growth rate positively or remains silence up to some level; beyond certain level it affects the growth rate negatively. That level of inflation is known as threshold level of Inflation. This paper estimates the threshold level of inflation for India from the period of April 2006 to May 2015. The threshold level of inflation treated as a regime point and the whole sample is divided into two different regimes i.e. from April 2006 to March 2013 and April 2013 to May 2015. This paper also focuses on interaction of inflation with other macroeconomic variables in two different regimes separately by using non-linear Structural Vector Autoregression (SVAR) model. We find that high inflation in the economy is the result of shocks in the interest rate, oil price and Nominal Effective Exchange rate (NEER) and which ultimately affects the economic growth in India.