Separating shocks from cyclicality in Indian aggregate supply

Ashima Goyal and Shruthi Tripathi
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Shruthi Tripathi: 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: Simultaneity issues as well as incorrect measurement of shocks and of the cyclical variable bias estimated slopes of the Indian aggregate supply curve (AS). Our initial Generalized Method of Moments estimation, based on a filtered output gap variable and including supply shocks, also gives an unrealistic downward sloping AS. But we find measures of asymmetries in price changes outperform traditional measures of supply shocks. Estimation using marginal costs as a proxy for the output gap gives a positive coefficient that reduces in size on including our comprehensive supply shock variable, implying the correct AS has a small positive slope, but is subject to multiple shifts. The semi-structural specification, closer to firms' actual decisions, gives estimates of structural parameters such as degree of price stickiness and extent of forward-looking price adjustment. The results more correctly separate shocks from cyclicality, help to interpret India's growth and inflation experience, and have implications for policy.

Keywords: Indian aggregate supply; slope; shocks; firms' price-setting; marginal costs (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015-03
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (21)

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Related works:
Journal Article: Separating shocks from cyclicality in Indian aggregate supply (2015)
Working Paper: Separating Shocks from Cyclicality in Indian Aggregate Supply (2015)
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