What is it about?
Stabilising inflation around certain preconceived level remains the predominant objective of monetary authorities all over the world as its variability has crucial ramifications on the real economy. However, the effective operation of monetary policy to this end largely hinges on the nature and dynamics of inflation both in the short-run and long-run. In this context, the present study focuses on theoretical investigation of how crude oil price fluctuations affect inflation in a real economy. Moreover, the study examines the nature of the relationship between crude oil price fluctuations and inflation and its impact with reference to the Indian economy. The study suggests that, in India, though the price of petroleum products are insulated against international crude oil price fluctuations by way of subsidies in order to curb inflation, in the long run, inflation manifest itself in the form of worsening fiscal deficit and undermine the sustainability of public debt.
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Why is it important?
The relevance of this research to policy formulation particularly in an oil-dependent economy like India is to deepen the understanding of the transmission of pass-through of oil price to inflation in order to help monetary authorities anticipate the effects of such fluctuations on inflation.
Perspectives
What we observe in the Indian economy is a continuous upward trend in crude oil prices which has its impact on common man’s standard of living with a greater proportion of money burden on the low-income class. The disproportionate impact of oil price shocks on richer as well as poorer sections of the society aggravates over time with respect to the intensity and frequency of price adjustments. In this context, bringing out the inflationary effect of oil-price shocks in the Indian economy is the major objective of the study. Also, I would be the transmission mechanism of inflation into the real economy is being discussed. The theoretical framework would aid in understanding the inflation dynamics.
Mr. GEORGE VARGHESE
Institute for Financial Management and Research
Read the Original
This page is a summary of: Inflationary effects of oil price shocks in Indian economy, Journal of Public Affairs, August 2016, Wiley,
DOI: 10.1002/pa.1614.
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