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Patrick Blagrave

the pattern predicted by the literature on trade integration, as shown in Figure 3 . This could imply that domestic factors dominate the core inflation process in most countries, as suggested by Forster and Tillman (2014) in their analysis of a group of 40 largely high-income countries. Alternatively, cross-border transmission of core inflation may take time to materialize, with changes in imported input prices taking time to feed through to consumer prices, and thus may not be captured at such a high frequency. 5 It also bears mentioning that over the medium

Patrick Blagrave
Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.
Patrick Blagrave and Weicheng Lian
We study the inflation process in India, focusing on the periods before and after the adoption of flexible inflation-forecast targeting (FIT) in India. Our analysis uses several approaches including standard Phillips curve estimation for headline and core inflation, an examination of the sensitivity of medium-term inflation expectations to inflation surprises, and the properties of convergence between headline and core inflation. Results indicate an important role for domestic factors in driving the inflation process, and there is evidence that expectations have become more anchored since 2015. This result could be attributable to FIT adoption, or to persistently low food prices which dominate the post-FIT-adoption period. The policy implications of these structural changes in the inflation process are investigated using a semi-structural model calibrated to the Indian economy.
Patrick Blagrave and Weicheng Lian

begins by examining headline and core inflation processes in India using standard Phillips curves ( Gali and Gertler (1999) ). We focus on differences between India and other emerging market and developing economies in the inflation processes. We find that the inertia of headline inflation in India between 2004Q1 and 2019Q4 was stronger than in other emerging markets examined in our study, and that the difference was entirely driven by the non-core inflation component. 5 Next, we take two steps to explore whether inflation expectations have become more anchored since

Mr. Jaromir Benes, Kevin Clinton, Asish George, Pranav Gupta, Joice John, Mr. Ondrej Kamenik, Mr. Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Mr. Rafael A Portillo, Hou Wang, and Fan Zhang
This paper outlines the key features of the production version of the quarterly projection model (QPM), which is a forward-looking open-economy gap model, calibrated to represent the Indian case, for generating forecasts and risk assessment as well as conducting policy analysis. QPM incorporates several India-specific features like the importance of the agricultural sector and food prices in the inflation process; features of monetary policy transmission and implications of an endogenous credibility process for monetary policy formulation. The paper also describes key properties and historical decompositions of some important macroeconomic variables.
Mr. Jaromir Benes, Kevin Clinton, Asish George, Pranav Gupta, Joice John, Mr. Ondrej Kamenik, Mr. Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Mr. Rafael A Portillo, Hou Wang, and Fan Zhang

). This is a kind of different specification for the reaction function. This is because, acknowledging that even though monetary policy may influence core inflation directly, policy needs to react to the headline inflation, pre-emptively, to that extent, so as to prevent the second-round impact of food and fuel prices on core inflation. A higher weight for the core inflation gap in the reaction function keeps the focus of monetary policy to stabilize core inflation and expectations and improve the credibility so as to induce a change in the non-core inflation process

International Monetary Fund. Asia and Pacific Dept

prices, economic activity, financial markets, and credit. For technical details see Karlsson (2013), Koop and Korobilis (2010) , Litterman (1986) , Timmermann (2006) . 4 By design, the DFM incorporates the information from a larger set of determinants, which tend to downplay the inflationary role of the drivers mentioned above, thus displaying a more moderate increase in core inflation. In the case of the BVAR, the complex lag structure and dynamic interactions among the endogenous variables results in a more persistent core inflation process, with the

International Monetary Fund. Asia and Pacific Dept
Spurred by an impressive vaccination drive, the economy is rebounding from a severe pandemic wave. The government successfully maintained fiscal, external, and financial stability. Nonetheless, the labor market recovery is lagging, with sizeable underemployment, small and medium sized enterprises remain vulnerable, problem loans are rising, real estate and corporate bond market risks are elevated, and the pandemic exacerbated longstanding structural challenges.