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News, noise and Indian business cycle

Ashima Goyal and Abhishek Kumar ()
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Abhishek Kumar: 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: New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models with various specifications oftechnology, markup and interest rate shocks are estimated with Indian data using Kalman filter basedpure and Bayesian likelihood estimation. Preference and interest rate shocks are found to be importantfor output determination whereas markup and interest rate shocks are important for inflation. News,such as contained in stock market variables and arising from anticipated interest rates, affects growth ofgross domestic product. Interest rate shock is anticipated at horizon of one quarter and out of totalvariance explained by interest rate shock, one third is due to the anticipated shock. Anticipated interestrate shock diminishes the role of preference shock in output determination. Markup shock has a largeshare, very low persistence but is correlated. There is evidence that permanent component of technologyis not well anticipated, and once we incorporate that technology shocks become more important fordetermination of output although it still remains much below US levels. Implications for policy aredrawn out.

Keywords: DSGE; India; News; Noise; Technology Shock; Learning; Anticipated Shocks; Kalman Filter; Maximum Likelihood; Inflation; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2019-04
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