Abstract
This paper estimates the unobserved inflation expectations in India between 1993: Q1 to 2017: Q1 from the Fisher equation relation based on the state space approach using Kalman Filter. We find inflation forecast obtained from Fischer equation by applying Kalman Filter match well with the inflation forecasts made by the Survey of Professional Forecasters and Inflation Expectations Survey of Household conducted by the Reserve Bank of India and the International Monetary Fund for the Indian economy.
Highlights
Inflation expectation is an important marker for monetary policy makers
We find inflation forecast obtained from Fischer equation by applying Kalman Filter match well with the inflation forecasts made by the Survey of Professional Forecasters and Inflation Expectations Survey of Household conducted by the Reserve Bank of India and the International Monetary Fund for the Indian economy
We find that between 1993: Q1 and 2017: Q1 the unobserved inflation expectations estimated from the Fisher equation match well with inflation forecasts made by the Survey of Professional Forecasters and Inflation Expectation Survey of Household conducted by the Reserve Bank of India (RBI) and the forecasts by the International Monetary Fund (IMF) for the Indian economy
Summary
Inflation expectation is an important marker for monetary policy makers. Both theoretically and empirically, it has been established that current inflation is influenced by expectations about future inflation and vice-versa. For economies where inflation targeting is an explicit policy goal, knowledge of inflation expectations is required to attain inflation anchoring. RBI has undertaken inflation targeting as one of the major monetary policy objectives for India. Data of inflation expectation given by RBI in Inflation Expectation Survey of Household (IESH) and Survey of Professional Forecasters (SPF) are very limited. RBI started publishing quarterly IESH from third quarter of 2006 and SPF from fourth quarter of 2007. This paper calculates the inflation forecast of India by applying unobserved component modelling based on Kalman Filter (KF) to the Fisher equation
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