Inflation, Output Gap, and the Episodic Phillips Curve in India

Arjun Mittal
Assistant Professor, Department of Commerce, Hansraj College, University of Delhi, Mahatma Hans Raj Marg, Malkaganj, New Delhi - 110 007  

Sonal Thukral
Associate Professor, Department of Commerce, Faculty of Commerce and Business, Delhi School of Economics, University of Delhi, New Delhi - 110 007 

Anand Mittal

Professor (Corresponding Author), Department of Economics, Hansraj College, University of Delhi, Mahatma Hans Raj Marg, Malkaganj, New Delhi - 110 007 

Devesh Pasari

Research Scholar, Department of Economics, Hansraj College, University of Delhi, Mahatma Hans Raj Marg, Malkaganj, New Delhi - 110 007 

Abstract

Purpose : This study examined whether India’s short-run Phillips Curve was a stable, structural relationship or an episodic one over 2010–2025, extending prior Indian evidence by 14 years through the flexible inflation targeting era across four inflation channels.

Design/Methodology/Approach : Using quarterly consumer price data (n = 62), the study estimated a full-sample ordinary least squares regression with a Hodrick-Prescott-filtered output gap and the real effective exchange rate as a supply-shock proxy, then tested long-run cointegration through bounds testing, structural stability through Chow tests, and time variation through rolling twelve-quarter regressions across 51 windows.

Findings : Inflation inertia dominated (β1 = 0.812, p < 0.001, R² = 0.772), and the output gap remained insignificant on average (β2 = 0.002, p = 0.949) and significant in only three of 51 rolling windows. The bounds test (F = 1.503) ruled out long-run cointegration, and policy transmission was significant only in the post-targeting period (β4 = −2.860, p < 0.05), with all Chow tests confirming stability.

Practical Implications : Rate tightening worked best when the output gap was clearly positive, and was counterproductive against food or fuel shocks. Anchoring the credibility of the inflation target remained the most reliable long-run disinflation tool.

Originality/Value : Among the first studies to apply rolling-window regression to India's quarterly Phillips Curve, the paper showed the relationship to be episodic rather than absent, with implications for central bank policy design.

Keywords: Phillips curve, inflation inertia, output gap, monetary policy transmission, flexible inflation targeting, rolling-window regression.

JEL Classification Codes : C22, E24, E31, E52

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