An Application of Quah and Vahey’s SVAR Methodology for Estimating Core Inflation in India: A Note

Joice John (), Abhiman Das () and Sanjay Singh ()
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Joice John: Reserve Bank of India
Abhiman Das: Indian Institute of Management
Sanjay Singh: Reserve Bank of India

Journal of Quantitative Economics, 2016, vol. 14, issue 1, No 8, 158 pages

Abstract: Abstract Inflation, calculated as year-on-year per cent change in general price level, represents a combined effect of several types of price changes. The monetary authorities primarily focus to track that part of inflation, which can be effectively monitored and controlled using various monetary instruments. This persistent component of inflation is termed as ‘Core Inflation’, which possesses long-run properties as well as predictive power to forecast inflation. This paper makes use of Quah and Vahey’s definition of core inflation as that component of headline inflation, which has no impact on output in medium to long run and estimates it by placing restrictions on vector auto regression system with inflation and output growth. The analysis is based on monthly data from April 1995 to January 2009. Empirical results showed that in India, during 2006 and 2007, the inflation process was stronger than what headline inflation figures actually depicted and in 2008 the inflationary process has tended to be somewhat weaker than what was observed in headline inflation.

Keywords: Core inflation; Structural vector auto regression (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s40953-015-0023-2

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