How core inflation reacts to the second round effects

Abstract

In order to evaluate the second round effects on core inflation, an econometric model based on auto-regressive vector technique was built. The way the core inflation reacts to the changes of oil and food prices on international markets, is an important matter for monetary policy. Another important issue for monetary policy is outlined by the internal markets, and mainly the way the core inflation responds, accordingly, to the changes of the fuel and food prices. The pay off of these changes on core inflation is apriori considered to be significant. The paper tests the above-mentioned hypothesis and the results of the study justify the impact of changes in oil and food prices on core inflation.