Causality between Inflation and Economic Growth in India: A Granger Causality Approach

This paper examines the relationship between gross domestic product (GDP) and inflation (WPI) in India during the period 1951- 2012. Vector Error Correction Method and co-integration techniques are used for analyzing the relationship between gross domestic product (GDP) and inflation (WPI) in this study. The Johansen co-integration test indicates gross domestic product (GDP) and inflation (WPI) are co-integrated, and that a long-run equilibrium exists between them. The Vector Error Correction test reveals that there is unidirectional causality running from inflation (WPI) to gross domestic product (GDP) in the long run. It means inflation (WPI) lead to gross domestic product (GDP) but gross domestic product (GDP) does not lead to inflation (WPI).