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Interfuel Substitution and Inflation Dynamics in India

  • Anirban Sengupta ORCID logo , Apostolos Serletis EMAIL logo and Libo Xu
Published/Copyright: December 1, 2023

Abstract

This paper uses neoclassical microeconomic theory to investigate the demand for energy and interfuel substitution in India at the sectoral level. It makes full use of the relevant economic theory and econometrics and generates inference in terms of Allen and Morishima elasticities of substitution that are internally consistent with the data and nonlinear models used. The results indicate that the interfuel substitution elasticities are consistently below unity in the household and power sectors, revealing the limited ability to substitute between major energy commodities in these two sectors. However, significant substitution relationships are found in the industrial and transportation sectors, suggesting that energy price changes in these sectors will significantly shift the demand for energy and consumption. Based on measured elasticities of substitution, we also discuss implications of energy price shocks on inflation and inflation targeting strategies by the central bank.

JEL Classification: C2; D4

Corresponding author: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada, E-mail:

Acknowledgments

We would like to thank Fredj Jawadi, an anonymous referee, and the participants in the 6th International Workshop on Financial Markets and Nonlinear Dynamics (FMND), that was held in Paris on June 2–3, 2022.

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Received: 2022-09-18
Accepted: 2023-10-03
Published Online: 2023-12-01

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