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