Economic Growth-Inflation Dynamic Trade-Offs in India: Stability Issues and Policy Implications

Abstract

Endogenous and exogenous shocks disrupt macroeconomic stability. Growth, inflation and external balance are used to evaluate macro performance of an economy. Examining the relationship between inflation and gross domestic product (GDP) has long been an important field in macroeconomic research. This paper examines the nature of dynamic trade-offs between inflation and output and their direction of causation in the Indian economy utilizing time series dataset over the period from 1950-51 to 2015-16 employing together with unit root tests, cointegration regression and causality tests. There is strong evidence of their bidirectional causality. The empirical findings help to translate certain important theoretical issues on structural adjustment problems into various policy relevant solutions and interrelationships examining the role and conduct of macroeconomic stabilisation policies with particular emphasis placed on the specific episodes on macroeconomic dips, the existence of recessionary episodes, the counter-cyclical nature of inflation and the sustainability of macroeconomic policies.