How Indian CPI and Industrial Production Respond to Global Oil Price Shocks? Regime-Dependent Impulse Responses ()
ABSTRACT
For emerging markets like India, where around 80
percent of the crude requirements are met through imports, it is an imperative
task to comprehend impact of global crude oil price shocks on Indian
macroeconomic variables. The present study attempts to understand these
asymmetric dynamic interactions between global crude oil price shocks and
Indian macroeconomic variables by employing Markov switching-Vector Autoregressive
(MS-VAR) regime-dependent impulse responses in level forms. The findings hold
an important place in the wake of inflation targeting regime adopted by the
monetary policy authorities. The findings highlight the existence of two
regimes, namely lower and higher oil price variance regimes. The response of
industrial production and consumer prices is different towards oil price shocks
in different regimes. In the lower oil variance regime, there is negative
(positive) relationship observed between crude oil shocks and industrial
production (consumer prices). On the other hand, there is a positive
equilibrium shift in the industrial production in the higher oil variance
regime with cost pushing inflationary pressures in the long run. The findings
bear strong implication for the policy makers in their attempt to combat
effects of crude oil shocks. As per the findings, the emerging market policy makers should
display a cautious approach during higher oil price volatile phases in order to
support industrial production and consumer demand.
Share and Cite:
Singh, A. and Singh, R. (2017) How Indian CPI and Industrial Production Respond to Global Oil Price Shocks? Regime-Dependent Impulse Responses.
Theoretical Economics Letters,
7, 1511-1531. doi:
10.4236/tel.2017.75102.