ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Inflation Targeting amidst Structural Change

The interconnection between relative price movements, structural change, and inflation targeting in a developing economy like India is studied through a simple macroeconomic model. Different sectors of a developing economy belong to distinctly different stages of development and grow at different rates. It is argued that changes in relative price and structural change are endogenously determined by imbalances in sectoral growth rates.

The Analytics of Changing Growth Rates

A vast amount of research has asked how and why the growth rates in the Indian economy have risen in recent decades. Implicit in much of that literature is the belief that if the growth rate has increased it must be because something underlying has changed - had some parameters embedded in the "structure" of the economy not changed, the growth rate would have been constant. This is, however, a presumption that may not be true. The search for structural "breaks" is the outcome of a preoccupation with steady states and constant rates of growth. To redress the balance this article provides some simple examples of models in which the rate of growth is never constant but changes endogenously over time. The lesson therefore is that changes in the growth rate have no necessary link with changes in the underlying economic regime or economic structure. This is not an India-specific point but is based on a general analytical argument.
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