A DSGE model-based analysis of the Indian slowdown

Ashima Goyal and Abhishek Kumar

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: In this paper we take a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to the Indian data using Kalman filter based maximum likelihood estimation. Our model based output gap tracks the statistical Hodrick-Prescott filter based output gap well. Comparison of estimated parameters, impulse responses and forecast error variance decomposition between India and United States points to differences in the structure of the two economies and of their inflationary process. Our estimates suggest higher value of habit persistence, more volatile markup and interest rate shocks in India. Markup shocks play a much larger role in determination of Indian inflation, pointing to the importance of supply side factors. Impulse responses show a higher impact of interest rate shocks on output and inflation, and lower impact of technology shocks on output in comparison to US. The latter again suggests the presence of supply side bottlenecks. We use smoothed states obtained from the Kalman filter to create counterfactual paths of output and Inflation (during 2009 Q4 to 2013 Q2) in presence of a given shock. In the post 2011 slowdown, monetary shock imposed significant output cost and for a brief period of time made the output gap negative.

Keywords: DSGE; India; Potential Output; Output Gap; Kalman Filter; Maximum Likelihood; Inflation; Monetary Policy; Supply Shock (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2017-04
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.igidr.ac.in/pdf/publication/WP-2017-003.pdf (application/pdf)

Related works:
Journal Article: A DSGE Model-Based Analysis of the Indian Slowdown (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2017-003

Access Statistics for this paper

More papers in Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India Contact information at EDIRC.
Bibliographic data for series maintained by Shamprasad M. Pujar ().