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If Monetary Aggregates, then Divisia

Author

Listed:
  • Naveen Srinivasan

    ((Corresponding author) Professor, Madras School of Economics, Chennai, India)

  • Parush Arora

    (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.

Suggested Citation

  • Naveen Srinivasan & Parush Arora, 2020. "If Monetary Aggregates, then Divisia," Working Papers 2020-192, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2020-192
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Divisia; Simple Sum; Monetary Aggregates; Phillips Curve; Inflation forecasting; P star model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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