Searching Threshold Inflation for India

Abstract

The present study is an effort to examine econometrically the presence of threshold level of inflation for India, in an environment where expected inflation is in double digit. This upward pressure on inflation is mainly due to rise in food prices; and high investment due to surge in domestic and international demand backed by industrial. High inflation not only costs central bank of the country but, it also affects the output negatively, if it is beyond the tolerable limit. Study uses specification of Sarel (1996) and Khan and Senhadji (2001) to estimate the point of threshold. The estimation result of the study confirms the presence of threshold level of inflation for India at 6 percent inflation rate and thus advocates the view of maintaining inflation rate below 6 percent for the healthy output growth rate in Indian economy. But study fails to confirm the same in Sarel (1996) sense.E31, E52, F36