If Monetary Aggregates, then Divisia

Naveen Srinivasan () and Parush Arora ()
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Naveen Srinivasan: (Corresponding author) Professor, Madras School of Economics, Chennai, India
Parush Arora: Madras School of Economics, Chennai, India

Working Papers from Madras School of Economics,Chennai,India

Abstract: 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.

Keywords: Divisia; Simple Sum; Monetary Aggregates; Phillips Curve; Inflation forecasting; P star model (search for similar items in EconPapers)
JEL-codes: E31 E37 E47 E52 E58 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2020-06
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ore
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