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Analysing Core Inflation in India: A Structural VAR Approach

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  • Goyal, Ashima
  • Pujari, Ayan Kumar

Abstract

Effective inflation targeting requires careful selection of the inflation target. It is necessary to leave out noisy elements, which monetary policy cannot control, but this exclusion should not be done in an ad hoc way. Rather core inflation should be determined from the structure of the economy. This paper estimates core inflation for India using Structural Vector Autoregression (SVAR). This method is based on both theory and the structure of the economy. Monthly data for wholesale price index (WPI) and index of industrial production (IIP) has been used, covering a long time span from January 1971 to July 2004. We analyze the impulse responses of inflation and output, test for several time series properties of core inflation and carry out a number of Granger causality tests between headline inflation, core inflation, output and a monetary aggregate.

Suggested Citation

  • Goyal, Ashima & Pujari, Ayan Kumar, 2005. "Analysing Core Inflation in India: A Structural VAR Approach," MPRA Paper 67105, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:67105
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Marianne Nessén & Ulf Söderström, 2001. "Core Inflation and Monetary Policy," International Finance, Wiley Blackwell, vol. 4(3), pages 401-439.
    3. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
    4. Hilde Christiane Bjørnland, 2001. "Identifying domestic and imported core inflation," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1819-1831.
    5. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
    6. Nessen, Marianne & Soderstrom, Ulf, 2001. "Core Inflation and Monetary Policy," International Finance, Wiley Blackwell, vol. 4(3), pages 401-439, Winter.
    7. Quah, Danny, 1995. "Misinterpreting the dynamic effects of aggregate demand and supply disturbances," Economics Letters, Elsevier, vol. 49(3), pages 247-250, September.
    8. Michael F. Bryan & Stephen G. Cecchetti, 1999. "The Monthly Measurement of Core Inflation in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 77-101, May.
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    Cited by:

    1. Ashima Goyal & Arjun Singh, 2007. "Through a Glass Darkly," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 1(2), pages 139-166, April.
    2. Pami Dua & Upasna Gaur, 2010. "Determination of inflation in an open economy Phillips curve framework: the case of developed and developing Asian countries," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 3(1), pages 33-51.
    3. Ashima Goyal & Arjun Singh, 2006. "Through a glass darkly: Deciphering the impact of oil price shocks," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2006-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Sujata Kar, 2010. "A Periodic Autoregressive Model of Indian WPI Inflation," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 4(3), pages 279-292, August.

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    More about this item

    Keywords

    Inflation Targeting; Core Inflation; Structural VAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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