Behavioral Expectations in New Keynesian DSGE Models: Evidence from India's COVID-19 Recovery and Vaccination Program

Arpan Chakraborty and Siddhartha Chattopadhyay

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Abstract: This paper extends the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework by incorporating behavioral expectations to analyze India's output gap moments, focusing on COVID-19 and vaccination effects. Departing from rational expectations models, we show that behavioral expectations better capture the non-normal distribution of India's output gap. Using Hodrick-Prescott and Kalman filters, we estimate the output gap and match it with simulated moments. Following Dasgupta and Rajeev (2023), we model the pandemic as a prolonged negative demand shock and vaccinations as a positive supply shock, deriving the initial negative demand shock from observed output gap declines. We then identify the optimal positive supply shock that best aligns with the actual moments of the filtered output gap data. Using Euclidean distance minimization, we obtain initial supply shock magnitudes of 0.41 and 0.3 for the HP and Kalman filter specifications, respectively. Moreover, we quantitatively extend previous work by Dasgupta and Rajeev (2023), which presented only a simple Keynesian analysis.

Date: 2024-11, Revised 2025-03
New Economics Papers: this item is included in nep-dge
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