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

  • Ashima Goyal

    ()

    (Indira Gandhi Institute of Development Research)

  • Arjun Singh

    ()

    (Indira Gandhi Institute of Development Research)

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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File URL: http://www.igidr.ac.in/pdf/publication/WP-2006-012.pdf
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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
Date of revision:
Handle: RePEc:ind:igiwpp:2006-012
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  1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  2. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  3. Hilde C. Bjørnland, 2000. "Identifying Domestic and Imported Core Inflation," IMF Working Papers 00/4, International Monetary Fund.
  4. Danny Quah & Shaun Vahey, 1995. "Measuring Core Inflation," Bank of England working papers 31, Bank of England.
  5. Scott Roger, 1998. "Core inflation: concepts, uses and measurement," Reserve Bank of New Zealand Discussion Paper Series G98/9, Reserve Bank of New Zealand.
  6. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  7. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, June.
  8. 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, vol. 0(Number 2), pages 1-32.
  9. Ashima Goyal & Ayan Kumar Pujari, 2005. "Analyzing Core Inflation in India: A Structural VAR Approach," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(2), pages 76- 90, May.
  10. 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.
  11. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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