What's New :
GS Mains Advance 2023, Batch Starts: 14th October.
Ethics Master Class (Mains 2023), Batch Starts: 17-Oct-2022

Finetuning of inflation-forecasting model

  • Category
    Economy
  • Published
    13th Apr, 2021

India’s central bank has revised its inflation-forecasting model to better capture how fiscal and monetary policy interact with real-economy elements just after days the RBI won approval from the government to retain the inflation target in between 2%-6% range for the next five years.

Context

India’s central bank has revised its inflation-forecasting model to better capture how fiscal and monetary policy interact with real-economy elements just after days the RBI won approval from the government to retain the inflation target in between 2%-6% range for the next five years.

About

The new Model or quarterly Projection Model 2.0

  • The Quarterly Projection Model 2.0 is an inflation forecasting model.
  • The new framework is a forward-looking, open economy, calibrated, new-Keynesian gap model.
  • The previous version was often criticized for over-estimating upside risks to inflation.
  • Under the new model the adjustments incorporate fiscal-monetary dynamics, which include
    • India’s unique and often chaotic fuel pricing regime
    • exchange-rate fluctuations and their impact on balance of payments

The new model is differentiated into three blocks:

  • First or fiscal block: It decomposes the government’s primary deficit into structural and cyclical components.
  • Second, or fuel block: It takes into account India’s complex system of pricing.
  • Third or balance of payments block: It recognizes the costs associated with spurts in volatility in the exchange rate.

Inflation 

  • It refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. 
  • Inflation measures the average price change in a basket of commodities and services over time.
X

Verifying, please be patient.

Enquire Now