A Basic Two-Sector New Keynesian DSGE Model of the Indian Economy
Abstract
Indian economy is going through underlying changes in the post-pandemic recovery process. Effects of policies, monetary or fiscal, on macroeconomy need a thorough analysis in these recessionary times. In this context, this study develops a closed-economy DSGE model to see the impact of monetary policy on the Indian economy. The model includes price rigidities, and parameters are calibrated using the data on Indian economy. The model includes two sectors – intermediate goods and final goods producers, an inflation-targeting regime following the Taylor rule. Model is simulated for a positive productivity shock and an expansionary monetary policy shock. Results show that a positive productivity shock improves overall economic activity, and an expansionary monetary policy shock increases output for the short term only.
References
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[24] Sharma, S., and Behera, H. 2022. A Dissection of Indian Growth Using a DSGE Filter. Journal of Asian Economics, 80: 101480. DOI: 10.1016/j.asieco.2022.101480
[25] Smets, F., and Wouters, R. 2003. An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area. Journal of the European Economic Association, 1 (5): 1123–75. DOI:https://doi.org/10.1162/154247603770383415
[26] Smets, F., and Wouters, R. 2007. Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach. American Economic Review, 97 (3): 586–606. DOI: 10.1257/aer.97.3.586
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[2] Banerjee, S., Basu, P. and Ghate, C. 2020. A Monetary Business Cycle Model for India. Economic Inquiry, 58 (3): 1362–86. DOI: https://doi.org/10.1111/ecin.12855
[3] Bernanke, B., Gertler, M. and Gilchrist, S. 1998. The Financial Accelerator in a Quantitative Business Cycle Framework. National Bureau of Economic Research.
[4] Calvo, G.A. 1983. Staggered Prices in a Utility-Maximizing Framework. Journal of Monetary Economics, 12 (3): 383–98. DOI: 10.3386/w6455
[5] Campbell, J. Y. 1994. Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model. Journal of Monetary Economics, 33 (3): 463–506. DOI: https://doi.org/10.1016/0304-3932(94)90040-X
[6] Christiano, L.J., Eichenbaum, M. and Evans, C. L. 1996. Identification and the Effects of Monetary Policy Shocks. Financial Factors in Economic Stabilization and Growth 36.
[7] Christiano, L. J., Eichenbaum, M., & Evans, C. L. 2005. Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy, 113 (1), 1–45. DOI: https://doi.org/10.1086/426038
[8] Costa, C. 2018. Understanding Dsge Models: Theory and Applications. Vernon Press.
[9] Das, R., and Nath, S. 2019. Capital Misallocation and Its Implications Fox India’s Potential GDP: An Evidence from India KLEMS. Indian Economic Review, 54 (2): 317–41. DOI: https://doi.org/10.1007/s41775-019-00055-4
[10] Dixit, A.K, and Stiglitz, J. E. 1977. Monopolistic Competition and Optimum Product Diversity. The American Economic Review, 67 (3): 297–308. Available at: http://www.jstor.org/stable/1831401
[11] Fernández-Villaverde, J., and Rubio-Ramírez, J.F. 2006. A Baseline DSGE Model. Unpublished Manuscript. Available at: http://Economics.Sas.Upenn.Edu/∼Jesusfv/Benchmark_DSGE.Pdf
[12] Gabriel, V. J, et al. 2011. An Estimated DSGE Model of the Indian Economy. National Inst. of Public Finance and Policy.
[13] Gabriel, V., et al. 2012. An Estimated DSGE Model of the Indian Economy.
[14] Gali, J. and Monacelli, T. 2008. Optimal Monetary and Fiscal Policy in a Currency Union. Journal of International Economics, 76 (1): 116–32. DOI: https://doi.org/10.1016/j.jinteco.2008.02.007
[15] Gertler, M., and Karadi, P. 2011. A Model of Unconventional Monetary Policy. Journal of Monetary Economics, 58 (1): 17–34. DOI: https://doi.org/10.1016/j.jmoneco.2010.10.004
[16] King, R.G, Plosser, C. I and Rebelo, S. T. 1988. Production, Growth and Business Cycles: I. The Basic Neoclassical Model. Journal of Monetary Economics, 21 (2–3): 195–232. DOI: https://doi.org/10.1016/0304-3932(88)90030-X
[17] Kydland, F. E., and Prescott, E. C. 1982. Time to Build and Aggregate Fluctuations. Econometrica: Journal of the Econometric Society, 1345–70. DOI: https://doi.org/10.2307/1913386
[18] Lucas, R.E. 1978. Asset Prices in an Exchange Economy. Econometrica, 46 (6): 1429–45. DOI:https://doi.org/10.2307/1913837
[19] Peiris, S., Saxegaard, M. and Anand, R.2010. An Estimated Model with Macrofinancial Linkages for India. Available at: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/An-Estimated-Model-with-Macrofinancial-Linkages-for-India-23529
[20] Rotemberg, J.J., and Woodford, M. 1997. An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy. NBER Macroeconomics Annual, 12: 297–346. Available at: https://www.nber.org/books-and-chapters/nber-macroeconomics-annual-1997-volume-12/optimization-based-econometric-framework-evaluation-monetary-policy
[21] Sarkar, A. 2020. Understanding the Short Run Relationship Between Stock Market and Growth in Emerging Economies. Journal of Quantitative Economics, 18 (2): 383–402. DOI: https://doi.org/10.1007/s40953-019-00183-x
[22] Sarkar, A. 2022. Understanding the COVID Economic Crisis: A Short- Run General Equilibrium Framework. South Asian Journal of Macroeconomics and Public Finance, 11(2), 217–245. DOI: https://doi.org/10.1177/22779787221097787
[23] Shah, S. A., and Garg, B. 2023. Testing Policy Effectiveness during COVID-19: An NK-DSGE Analysis. Journal of Asian Economics, 84 (February): 101577. DOI: https://doi.org/10.1016/j.asieco.2022.101577
[24] Sharma, S., and Behera, H. 2022. A Dissection of Indian Growth Using a DSGE Filter. Journal of Asian Economics, 80: 101480. DOI: 10.1016/j.asieco.2022.101480
[25] Smets, F., and Wouters, R. 2003. An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area. Journal of the European Economic Association, 1 (5): 1123–75. DOI:https://doi.org/10.1162/154247603770383415
[26] Smets, F., and Wouters, R. 2007. Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach. American Economic Review, 97 (3): 586–606. DOI: 10.1257/aer.97.3.586
[27] Taylor, J. B. 1993. Discretion versus Policy Rules in Practice. In Carnegie-Rochester Conference Series on Public Policy, 39: 195–214. DOI: https://doi.org/10.1016/0167-2231(93)90009
[28] Uhlig, H. 1999. A Toolkit for Analysing Nonlinear Dynamic Stochastic Models Easily. Oxford University Press
Published
2023-06-26
How to Cite
KUMAR, Anshul.
A Basic Two-Sector New Keynesian DSGE Model of the Indian Economy.
Theoretical and Practical Research in Economic Fields, [S.l.], v. 14, n. 1, p. 36 - 50, june 2023.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/7861>. Date accessed: 22 dec. 2024.
doi: https://doi.org/10.14505/tpref.v14.1(27).04.
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