Published: 10th 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.
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