New Keynesian Models and Their Application to Inflation Dynamics in India

Abstract

India is a fast-growing emerging economy with its own set of macroeconomic problems; using New Keynesian models can help us understand the dynamics of inflation there. A more contemporary way to look at inflation is through the New Keynesian paradigm, which places an emphasis on expectations of inflation, forward-looking behaviour, and nominal rigidities. apply the NKPC to the inflation data from India in order to study the connection between expectations, production gaps, and inflation. Using time-series econometrics, this article examines the NKPC's usefulness and applicability in understanding the dynamics of inflation in India, taking into consideration important factors including changes in output, real marginal costs, and price expectations. factors outside India's control, such as shifts in the value of the rupee, changes in the cost of raw materials, and supply-side shocks, all of which have a major impact on the country's inflation rate. While the results show that New Keynesian models do a good job of explaining inflation, the study of supply-side variables and external shocks is still essential for understanding the dynamics of inflation in India. refining New Keynesian models to address the unique difficulties of developing-world inflation modelling and bringing them up to speed with the demands of growing markets like India's.