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Through a Glass Darkly - Deciphering the Impact of Oil Price Shocks

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Arjun Singh

Abstract

In order to examine if the impact of oil price shocks depends on the structure of an economy, a vertical (VSC) and a horizontal (HSC) long-run supply curve identification are successively imposed on a three variable VAR with Indian time series data. While core inflation is measured with the VSC, the HSC requires a new concept of demand-driven inflation : Residual (demand) inflation, which gives the impact of short and medium run demand shocks on inflation. Core and residual inflation are both estimated. The data favors the HSC, but both identifications imply that policy demand squeeze aggravated international oil price shocks.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22374.

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Date of creation: Jan 2006
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Handle: RePEc:eab:macroe:22374

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Keywords: Oil shocks; VAR; Identification strategies; Developing economy; Residual Inflation;

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  1. Ashima Goyal & Ayan Kumar Pujari, 2005. "Analyzing Core Inflation in India: A Structural VAR Approach," The IUP Journal of Monetary Economics, IUP Publications, IUP Publications, vol. 0(2), pages 76- 90, May.
  2. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers, National Bureau of Economic Research, Inc 4303, National Bureau of Economic Research, Inc.
  3. Hilde C. Bjørnland, 2000. "Identifying Domestic and Imported Core Inflation," IMF Working Papers, International Monetary Fund 00/4, International Monetary Fund.
  4. Danny Quah & Shaun Vahey, 1995. "Measuring Core Inflation," Bank of England working papers, Bank of England 31, Bank of England.
  5. Donald W. Jones, Paul N. Leiby and Inja K. Paik, 2004. "Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2), pages 1-32.
  6. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, Elsevier, vol. 113(2), pages 363-398, April.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  8. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(2), pages 540-61, May.
  10. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262062038, December.
  11. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand G98/9, Reserve Bank of New Zealand.
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Cited by:
  1. Ashima Goyal & Sanchit Arora, 2012. "Deriving India's Potential growth from theory and structure," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2012-018, Indira Gandhi Institute of Development Research, Mumbai, India.

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