A Macro-Fiscal Modeling Framework for Forecasting and Policy ...

(iv) Rate of Inflation and Rate of Interest
Chart 1.5 shows the time profile of inflation rate based on the implicit price deflator of
GDP at market prices and investment. Both of these move almost in the same way with
minor variations. Interestingly since 1999-00 both of these kept below 5 percent level
except for the inflation with respect to implicit price deflator of investment in only one
year, 2004-05.
Chart 1.6 depicts the growth pattern of both long term and short term interest
rates over the years. In 1950-51, the long term rate was 5.48 percent and the short term
rate was 1.86 percent. They converged to about 6.8 percent in 1968-69. After that year,
they moved together with the former increasing to 13 percent and the latter to 12
percent in 1991-92. However, in 2007-08, both the long term and short term interest
rates were about 8.5 percent.
Chart 1.5: Inflation Rates with respect to Implicit Price Deflators of GDP (at
Market Prices) and Investment
30
25
20
15
10
5
0
-5
-10
-15
GDP
Investment
16