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

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Understanding Inflation and Controlling It

Inflation management is one of the hardest tasks an economic policymaker has to undertake. It would appear at first sight that one can rely entirely on common sense to carry it out. But that would be a mistaken notion. While inflation policy does require judgment and intuition, it is essential that these be backed up with statistical information and an understanding of economic theory. This paper tries to bring together the formal analytics that underlie inflation policy. It surveys some of the standard ideas and also questions some of them and, in the process, tries to push outwards the frontiers of our understanding.

This paper is based on the rst Gautam Mathur Lecture that was delivered in New Delhi on 18 May 2011 at the invitation of Santosh Mehrotra. I am grateful to Montek Singh Ahluwalia for his extensive and valuable comments following the lecture. In writing this paper I have beneted greatly from discussions with Surjit Bhalla, S Bhavani, Anil Bisen, Satya Das, Dipak Dasgupta, Supriyo De, R N Dubey, Russell Green, Vijay Joshi, Kalicharan, Rajiv Kumar, Ken Kletzer, Rajnish Mehra, Dilip Mookherjee, Sudipto Mundle, Debraj Ray, Rajashri Ray, T Rabi Sankar, Partha Sen, Nirvikar Singh and T N Srinivasan. I also thank Rangeet Ghosh and Shweta for research assistance.

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