If Monetary Aggregates, then Divisia

This paper empirically tests whether the inclusion of monetary aggregates in inflation forecasting models helps their forecasting ability or not. We have estimated the P-star model with Divisia M2, Divisia M3, simple sum M2, and simple sum M3 along with Phillips curve and ARIMA specifications to forecast inflation for India from April 1994 to December 2016. We find that inflation forecasting ability of both Divisia monetary aggregate and the simple sum monetary aggregates are similar. Though Divisia fits better than simple sum from 1993-2013, the information contained in Divisia does not explain the behaviour of inflation post-2013.