Dear Naveed,

I an attached a article regarding impulse response function. Therefore, you read very well this article and get answer your question from it

Hi

In theory Yes. Using the Monetary theory. is a simple regression. P = a M/Y

But is rubbish, because it only preview the trend. In the trend we will be all dead.

The Taylor form in http://www.investopedia.com/articles/economics/10/taylor-rule.asp . He adds the interest rates.

30 years ago I try one formula that gave me a R2 of 0.98 but as it was my own theory it was not accepted in the UNi, an imminent teacher of the Universidade Nova de Lisboa.

My idea is that Prices are scape that balance all imbalances, like a physical centre of gravity.

So, if I remember, I did. Pi (inflation) =  a (M%Growth - GDP % )+ (Pi of Import goods)+ c(population%-GDP%)+ d( interest rates) etc... I add some lags

What I think was absolutely new was the idea that interest rates pull inflation further not down like everybody thinks. My idea is that the usual mark-up that all businesses using affects inflation in a direct form.

My logic is simple as a dog logic. If the bank increase the rates the business immediately will increase the prices (supply side) the money is more expensive there are more costs, later the consumer will notice that he has less money to spend  but the inflation was already there. There are another law in economics that is there is always resistance to downside the prices. So I suppose that the effects of interests are on both ways it depends on the lag,d on the chok and on the stating point of the interest rates.

The lag makes interfering Supply and de increasing side of Demand, and the size of the change and the starting point will decide the case.

I remember to live in a country were the inflation was more than 20% and the rates too. They go side by side. Obviously if there are more money there are conditions to have more inflation. But not always. Economics is a Social Science, economists like to present themselves as mathematicians but the math on this is rubbish too.

Unfortunately I can not prof because my life went in other direction I did not made studies on that subject. Go for it. Good luck. Make a revolution on this. A fact is now the rates are low and the inflation too, despite of the  ups and downs of the petrol.

Hi Naveed,

To estimate impulse function you can estimate an bivariate VECM (if your time series are cointegrated) or bivariate VAR (if your time series are stationary) with the to variables inflation and monetary policy index.

Best regards,

Youssef