UBC Theses and Dissertations

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UBC Theses and Dissertations

Essays on inflation and macroeconomic dynamics in India Gemaliel Vimala, Nadhanael


This thesis comprises of three core chapters. Chapter 2 is the first core chapter. Compiling a novel dataset on food prices in India, I show that food prices exhibit varying degrees of price stickiness and it goes up once we exclude temporary price changes. Price setting behaviour in food sector matches predictions of sticky price models. Inflation based on a measure of sticky food prices -by re-weighting food group of CPI with degree of stickiness- does not perfectly align with the conventional measure of core inflation(excluding food and fuel) and therefore, monetary policy cannot ignore the dynamics of food prices. Chapter 3 looks at the nature of price setting in food markets in India. I show that in the case of prices in physical stores, there is a strong tendency for prices to be rounded at zero or five generating significant bunching. Bunched prices are much more likely to remain constant and price transitions are dominated by movements across bunched points. Prices are much more flexible in an online setting and bunching reduces significantly. I embed this friction of rounding at price points into a standard menu cost model to show that the extent to which price points contribute to price stickiness is conditional on the distance between price points, size of menu costs as well the level of prices. In case of offline food prices, I show that in the absence of price points, menu costs would have to be 30% higher to generate the same level of price stickiness. Chapter 4 documents the impact of India’s COVID-19 lockdown on the food supply chain. Food arrivals in wholesale markets dropped by 69% in the three weeks following the lockdown and wholesale prices rose by 8%. Six weeks after the lockdown began, volumes and prices had fully recovered. The initial food supply shock was highly correlated with early incidence of COVID-19. Using between state and within state variation in covid cases and food supply, we show that this correlation is due more to state-level lockdown policy variation than local responses of those in the food supply chain.

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