Rational Expectations and Price Behaviour in India

It has been claimed that a principal proposition of the New Classical Macro-economics, namely, the neutrality of anticipated monetary growth under rational expectations, is applicable to the Indian economy, I provide evidence to refute this view. The results presented here bear a greater claim being based, as they are, upon superior modelling and more acceptable econometric practice. They suggest, among other things, that the monetary authority in India cannot be certain of containing inflation solely by implementing a pre-announced reduction in the money growth rate, leave alone being able to do so costlessly.