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

30 Pages Posted: 28 Nov 2006

See all articles by Ashima Goyal

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR)

Arjun Singh

Indira Gandhi Institute of Development Research (IGIDR)

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

Goyal, Ashima and Singh, Arjun, Through a Glass Darkly: Deciphering the Impact of Oil Price Shocks (November 2006). Available at SSRN: https://ssrn.com/abstract=947462 or http://dx.doi.org/10.2139/ssrn.947462

Ashima Goyal (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
+91 22 28400920 (Phone)
+91 22 28402752 (Fax)

HOME PAGE: http://www.igidr.ac.in/~ashima

Arjun Singh

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

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