A New Keynesian AD-AS Model for India, Incorporating the Effect of Covid-19 Pandemic

Naoyuki Yoshino (), K. U. Gopakumar (), Rajendra N. Paramanik (), Farhad Taghizadeh-Hesary (), Ma. Laarni Revilla () and K. E. Seetha Ram ()
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K. U. Gopakumar: Sri Sathya Sai Institute of Higher Learning
Rajendra N. Paramanik: Indian Institute of Technology
Ma. Laarni Revilla: The World Bank Office
K. E. Seetha Ram: ADBI

A chapter in Studies in International Economics and Finance, 2022, pp 21-41 from Springer

Abstract: Abstract This chapter is an empirical attempt to model Indian economy at an aggregate level using annual samples from 1980–81 through 2020–21. Major theoretical premise of the chapter follows the New Keynesian AD-AS framework with backward-looking inflation expectations. Aggregate demand is captured via its components, namely private consumption, private investment, exports and imports. Together, the New Keynesian Phillips curve and neo-classical production function represents aggregate supply. The study also measures the impact of Covid-19 on the Indian economy through the components of aggregate demand and aggregate supply. As expected, the impact of the pandemic is negative, with a sharper decline in aggregate supply when compared to aggregate demand during FY 2019–20 and FY 2020–21. Turing to policy options, fiscal stimulus via capital formation is found to be more effective than higher government consumption expenditure or expansionary monetary policy by maintaining lower interest rates.

Keywords: Macroeconomic model; Aggregate demand; Aggregate Supply; New Keynesian framework; Covid-19 pandemic (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isbchp:978-981-16-7062-6_2

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DOI: 10.1007/978-981-16-7062-6_2

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