Title: New Keynesian aggregate supply in the tropics: food prices, wages and inflation

Authors: Ashima Goyal; Shruti Tripathi

Addresses: Indira Gandhi Institute of Development Research, Gen. Vaidya Marg, Santosh Nagar, Goregaon (E), Mumbai, 400065, India. ' Indira Gandhi Institute of Development Research, Gen. Vaidya Marg, Santosh Nagar, Goregaon (E), Mumbai, 400065, India

Abstract: Since consumer prices are a weighted average of domestic and imported goods prices, domestic Price Inflation (WPII) should cause Consumer Price Inflation (CPII). But at low per capita incomes average wages respond to food prices, raising costs and hence domestic prices. Then CPII, for which food is the dominant component, should Granger cause WPII. This reverse causality is derived and finds support in an estimated new Keynesian Aggregate Supply (AS) framework with the wage-price link. The AS and the identity both hold as long-run cointegrating relationships. The AS is elastic but food prices and the exchange rate are important for inflation.

Keywords: consumer price inflation; wholesale price inflation; aggregate supply; Granger causality; cointegration; VECM; consumer prices; Keynesian aggregate supply; wages; food prices; exchange rate.

DOI: 10.1504/IJMEF.2011.043399

International Journal of Monetary Economics and Finance, 2011 Vol.4 No.4, pp.330 - 354

Available online: 27 Oct 2011 *

Full-text access for editors Access for subscribers Purchase this article Comment on this article