<p>Stock and Watson use log approximation and quarterly data. Premultiplying the log approximation by 400 could be due to data being quarterly. </p>

<p>Your second method is fine too. </p>

CC BY-SA 3.0
2017-12-02T10:33:31.957Z
2017-12-02T10:33:31.957Z
london
<p>For an assignment I need to perform a VAR model on the three variables real GDP, short term interest rate and inflation. While for the first two variables I have not any problem, I am struggling to understand how to obtain a reliable "inflation" time series to be used for the  model. </p>

<p>An expression I found on "Vector Autoregressions" by James H. Stock and Mark W. Watson is:
$$
\pi_t = 400 \ln \left(\frac{P_t}{P_{t-1}}\right) 
$$
where $P_t$ is the chain-weighted GDP index.
However, I don't understand the reasoning behind this expression (why 400?) and I'd prefer to avoid using the chain-weighted GDP index since is an index I don't know very well.</p>

<p>I'd like to start from the GDP deflator. I tried with some reasoning to obtain an useful expression and I came to the conclusion that maybe a good variable is:
$$
\pi_t = \frac{DEF_t -DEF_{t-1}}{DEF_t}
$$</p>

<p>Is that correct? Which is the best series to use as inflation for the VAR model?</p>

<macroeconomics><inflation><autoregressive>
How to calculate inflation rate in order to perfom VAR model?
skdys
# How to calculate inflation rate in order to perfom VAR model?

(Asked by: username_0 on 2017-12-02)

For an assignment I need to perform a VAR model on the three variables real GDP, short term interest rate and inflation. While for the first two variables I have not any problem, I am struggling to understand how to obtain a reliable "inflation" time series to be used for the model.

An expression I found on "Vector Autoregressions" by James H. Stock and Mark W. Watson is:
$$
\pi\_t = 400 \ln \left(\frac{P\_t}{P\_{t-1}}\right)
$$
where $P\_t$ is the chain-weighted GDP index.
However, I don't understand the reasoning behind this expression (why 400?) and I'd prefer to avoid using the chain-weighted GDP index since is an index I don't know very well.

I'd like to start from the GDP deflator. I tried with some reasoning to obtain an useful expression and I came to the conclusion that maybe a good variable is:
$$
\pi\_t = \frac{DEF\_t -DEF\_{t-1}}{DEF\_t}
$$

Is that correct? Which is the best series to use as inflation for the VAR model?

**Tags:** macroeconomics, inflation, autoregressive

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## 1 answers

### Answer by username_1 on 2017-12-02. Score: 1 | Accepted answer

Stock and Watson use log approximation and quarterly data. Premultiplying the log approximation by 400 could be due to data being quarterly.

Your second method is fine too.


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