The Indian inflation–growth relationship revisited: robust evidence from time–frequency analysis

Abstract

This article re-visits the inflation–growth nexus in India using the tools of wavelet, i.e. wavelet correlation, wavelet cross-correlation and scale by scale Granger causality test. Wavelet cross-correlation analysis shows that at the shortest scales inflation and economic growth were independent; at medium scales, there exists feedback effect; and at higher scales, only economic growth is leading to inflation. Furthermore, we find: (a) high and increasing dependence between inflation and economic growth, particularly after mid-2002; (b) high-frequency components of economic growth Granger-cause low-frequency component of CPI-based inflation and vice-versa, and at all scales economic growth Granger-cause inflation at scales of 4–6 and no evidence of causality was detected from WPI-based inflation to economic growth; (c) results indicate that there is no long-run causal link between inflation and economic growth. This study presents new insights for policymakers to sustain economic development by using inflation as an economic tool in India.