Dynamics of inflation in India – a P-Star approach
P-Star models have become increasingly popular in recent years in developed countries. However data constraints have limited their applicability to the LDCs. In this paper, such a model is attempted for India using both annual and quarterly data for the period 1955–1995. It is found that velocity in India is trend stationary and using cointegration techniques it is then possible to develop a model to gauge inflationary pressures in the economy. The model is well calibrated to data, and in out-of-sample forecasts, it significantly outperforms a seasonal ARMA benchmark model. The velocity gap version of the model is particularly successful.