Analysing Core Inflation in India: A Structural VAR Approach

Goyal, Ashima and Pujari, Ayan Kumar (2005): Analysing Core Inflation in India: A Structural VAR Approach. Published in: ICFAI Journal of Monetary Economics , Vol. 3, No. 2 (May 2005): pp. 76-90.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation Targeting, Core Inflation, Structural VAR
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

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