Response of various macroeconomic variables to Oil and Food Price Shocks in India

What is it about?

In this study, our prime concern is to trace out the dynamic responses of Indian macroeconomic variables to oil and food price shocks and their associated volatility. In addition to the short-run dynamics, our focus will also, switch to long-run impacts of these shocks. we have used Hamilton's 1996 measure of oil and food price shocks and applied the Lee et al.'s 1995 AR (1) - GARCH(1, 1) for volatility measurement. we conducted the empirical exercise in a structural vector-autoregression framework, considered as superior and suitable to examine the contemporaneous impacts of variables within a system.

Featured Image

Why is it important?

Our results reported the severe macroeconomic ramifications of both the types of shocks. Shocks exerted an asymmetric influence on the output variable, with positive shocks being more influential than the counter ones. Inflation responds positively to all the three transformations of shocks with no signs of coming down, highlighting the downward price inflexibility in India. The study found the absence of any negative demand shocks in the face of the volatility of oil and food prices. The monetary authorities responded with interest rate hikes to counter the inflation tendencies in the economy. Forecast error variance highlights the increased magnitude of external shocks in the domestic variables after their own shocks, with food prices hikes showing relatively higher proportions in explaining the domestic inflation. Finally, the study found the downward inflation rigidity even in the long -run.

Perspectives