The stability of the Phillips curve in India: Does the Lucas critique apply?

The overwhelming majority of the literature that has attempted to estimate a Phillips curve for India has found that the model does not fit the data, with the notable exception of Paul (2009). However, this paper argues that the Indian Phillips curve can be estimated using standard econometric techniques, as opposed to several special adjustments that are required in Paul (2009)'s work. Once we establish the existence of the Phillips curve in India, we examine whether the Lucas critique applies to the behavior of the model under different Reserve Bank of India (RBI) Governors. We find that there is little-to-no evidence for structural change in the model between successive RBI Governors. Hence the results demonstrate that the Phillips curve is alive and well in India, and that the Lucas critique does not apply empirically to Indian inflation-output data.

► The majority of the literature that has attempted to estimate a Phillips curve for India has found that the model does not fit the data, with the exception of Paul (2009). ► This paper argues that the Indian Phillips curve can be estimated using standard econometric techniques, as opposed to several special adjustments that are made in Paul (2009). ► Once we establish the existence of the Phillips curve in India, we examine whether the Lucas critique applies to the behavior of the model under different Reserve Bank of India (RBI) Governors. ► We find that there is little-to-no evidence for structural change in the model between successive RBI Governors. ► Hence the results demonstrate that the Phillips curve is alive and well in India, and that the Lucas critique does not apply empirically to Indian inflation-output data.