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Through a glass darkly: Deciphering the impact of oil price shocks

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Author Info
Ashima Goyal () (Indira Gandhi Institute of Development Research)
Arjun Singh () (Indira Gandhi Institute of Development Research)
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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Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2006-012.

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Length: 31 pages
Date of creation: Dec 2006
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Handle: RePEc:ind:igiwpp:2006-012

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Related research
Keywords: Oil Shocks; VAR; Identification strategies; Developing economy; Residual Inflation;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  2. Danny Quah & Shaun Vahey, . "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
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  3. Bjornland, Hilde Christiane, 2001. "Identifying Domestic and Imported Core Inflation," Applied Economics, Taylor and Francis Journals, vol. 33(14), pages 1819-31, November. [Downloadable!] (restricted)
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  4. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  5. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand. [Downloadable!]
  8. Hooker, Mark A, 2002. "Are Oil Shocks Inflationary? Asymmetric and Nonlinear Specifications versus Changes in Regime," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 540-61, May.
  9. Donald W. Jones & Paul N. Leiby & Inja K. Paik, 2004. "Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996," The Energy Journal, International Association for Energy Economics, vol. 25(2), pages 1-32.
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