Deriving India's Potential growth from theory and structure

Ashima Goyal and Sanchit Arora ()
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Sanchit Arora: Indira Gandhi Institute of Development Research

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

Abstract: Estimates suggest that Indian aggregate supply is elastic but subject to upward shocks. If supply shocksmake a high persistent contribution to inflation, it implies second round pass through is occurring, implying growth has reached its potential. This measure of potential growth draws on both theory and the structure of the Indian economy. It turns out supply shocks largely explain inflation. Output reached potential only in the years 2007-08 when growth rates exceeded 9 percent. In the period 2010-11 there was no sustained excess of growth over potential. Inflation was due to multiple supply shocks, rather than second round effects. Estimated linear and Markov switching policy rules suggest there wasovercorrection in 2011.They show a two percent underestimate of potential output leads to a 50 basis point rise in policy rates.

Keywords: Potential growth; demand and supply shocks; Markov switching policy rules (search for similar items in EconPapers)
JEL-codes: E22 E32 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-09
New Economics Papers: this item is included in nep-fdg and nep-mac
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Citations: View citations in EconPapers (6)

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