Through a Glass Darkly: Deciphering the Impact of Oil Price Shocks
30 Pages Posted: 28 Nov 2006
Date Written: November 2006
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.
Keywords: Oil Shocks, VAR, Identification strategies, Developing economy, Residual Inflation
JEL Classification: E31, C32
Suggested Citation: Suggested Citation
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