News, Noise and Indian Business Cycle

Published By: Indira Gandhi Institute of Development Research, M | Published Date: April, 01 , 2019

New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models with various specifications of technology, markup and interest rate shocks are estimated with Indian data using Kalman filter based pure and Bayesian likelihood estimation. Preference and interest rate shocks are found to be important for 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 of gross domestic product. Interest rate shock is anticipated at horizon of one quarter and out of total variance explained by interest rate shock, one third is due to the anticipated shock. Anticipated interest rate shock diminishes the role of preference shock in output determination. Markup shock has a large share, very low persistence but is correlated. There is evidence that permanent component of technology is not well anticipated, and once we incorporate that technology shocks become more important for determination of output although it still remains much below US levels. Implications for policy are drawn out.

Author(s): Ashima Goyal, Abhishek Kumar | Posted on: Apr 25, 2019 | Views() | Download (115)

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