Threshold Level of Inflation for India

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					                                Discussion Paper Series No. 124/2008




              Draft and not to be quoted without Author’s permission




Threshold Level of Inflation
         for India


  N.R. Bhanumurthy & Dony Alex




INSTITUTE OF ECONOMIC GROWTH
 UNIVERSITY OF DELHI ENCLAVE
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                          Threshold Level of Inflation for India


                             N R Bhanumurthy & Dony Alex


Abstract:-

The current rise in the inflation rate to above 5% seems to have questioned the whole
macroeconomic management in India. After experiencing an average inflation of more
than 8% in the last decade, the present inflation rate should not be alarming. But, given
the recent criticism on the macroeconomic policy in managing inflation, it appears that it
is not the tolerable level of inflation. This calls for estimating a threshold inflation rate for
India, which this study tries to address. By using the Khan & Senhadji (2001) framework,
in a non-linear way, this paper tries to estimate threshold inflation for India. Our results
show that the threshold inflation level is at 4 to 4.5%, and found that above this threshold
level is growth retarding.




For full paper please write to author at bhanu@iegindia.org.