A DSGE Model-Based Analysis of the Indian Slowdown

A New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with habit persistence used to examine the US slowdown is also used to analyze the contribution of basic demand and supply shocks to the Indian slowdown. Kalman filter-based maximum likelihood estimation is undertaken with Indian output, inflation and interest rate data. First, our model based output gap tracks the statistical Hodrick–Prescott filter-based output gap well. Second, comparison of estimated parameters, impulse responses and forecast error variance decomposition between India and the US brings out the differences in policy responses, the structure of the two economies and their inflationary processes. There is a higher impact of interest rate shocks on output and inflation, and lower impact of technology shocks on output but higher on inflation in comparison to US. The former indicates monetary policy over-reaction and the latter validates a supply curve that technology shocks shift and inadequate adjustment of actual to potential output. Habit persistence is higher, markup and interest rate shocks are more volatile in India. Markup shocks play a much larger role in determination of Indian inflation again pointing to the importance of supply side factors. Third, smoothed states obtained from the Kalman filter to create counterfactual paths of output and inflation (during 2009:Q4 to 2013:Q2) in the presence of a given shock, show monetary shocks imposed significant output cost. The output gap was negative post the 2011 slowdown and in 2016.

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TECHNOLOGY SHOCKS AND BUSINESS CYCLES IN INDIA

Macroeconomic Dynamics ◽

10.1017/s1365100517000438 ◽

2017 ◽

Vol 23 (5) ◽

pp. 1721-1756 ◽

Cited By ~ 4

Author(s):

Shesadri Banerjee ◽

Parantap Basu

Keyword(s):

Interest Rate ◽

Open Economy ◽

Emerging Market ◽

Small Open Economy ◽

Annual Data ◽

Technology Shocks ◽

Demand Side ◽

Aggregate Fluctuations ◽

Dsge Model ◽

Dynamic Stochastic

In this paper, we develop a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model to understand the relative importance of two key technology shocks, Hicks neutral total factor productivity (TFP) shock and investment specific technology (IST) shock for an emerging market economy like India. In addition to these two shocks, our model includes three demand side shocks such as fiscal spending, home interest rate, and foreign interest rate. Using a Bayesian approach, we estimate our DSGE model with Indian annual data for key macroeconomic variables over the period of 1971–2010, and for subsamples of pre-liberalization (1971–1990) and post-liberalization (1991–2010) periods. Our study reveals three main results. First, output correlates positively with TFP, but negatively with IST. Second, TFP and IST shocks are the first and the second most important contributors to aggregate fluctuations in India. In contrast, the demand side disturbances play a limited role. Third, although TFP plays a major role in determining aggregate fluctuations, its importance vis-à-vis IST has declined during the post liberalization era. We find that structural shifts of nominal friction and relative home bias for consumption to investment in the post-liberalization period can account for the rising importance of the IST shocks in India.

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Assessing Volatilities of Monetary Policy and their Effects on the Islamic and Conventional Stock Markets in Indonesia

Signifikan Jurnal Ilmu Ekonomi ◽

10.15408/sjie.v7i2.7352 ◽

2018 ◽

Vol 7 (2) ◽

pp. 161-172

Author(s):

M Shabri Abd Majid

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Interest Rates ◽

Money Supply ◽

Open Economy ◽

Stock Markets ◽

Monetary Shocks ◽

Policy Makers ◽

The Us

The main objective of this study is to empirically assess the volatilities of the monetary policy instruments and their effects on the Indonesian Islamic and conventional stock market. The changes in exchange rate, interest rates, and money supply and their effects on the stock markets are investigated using the using the Generalized Autoregressive Conditional Heteroskedasticity frameworks. As a big-open economy, the capital market of Indonesia is vulnerable to the global monetary shocks changes, thus the US federal funds rate is also incorporated into the GARCH model. The study documented that, with the exception of the US interest rate, the volatilities of all monetary policy variables of interest rate, exchange rate, and money supply were documented affecting the volatilities of both Islamic and conventional stock markets. These findings imply that the volatilities of Islamic and conventional stock markets have similar determinants, thus to stabilize the markets, the investigated monetary policy variables should be controlled for by the policy-makers. Any monetary policy design imposed by the policy-makers would have a similar effect on both conventional and Islamic stocks in Indonesia.DOI: 10.15408/sjie.v7i2.7352

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The Empirical Implications of the Interest-Rate Lower Bound

The American Economic Review ◽

10.1257/aer.20121437 ◽

2017 ◽

Vol 107 (7) ◽

pp. 1971-2006 ◽

Cited By ~ 55

Author(s):

Christopher Gust ◽

Edward Herbst ◽

David López-Salido ◽

Matthew E. Smith

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Lower Bound ◽

Bayesian Methods ◽

Dsge Model ◽

Slow Recovery ◽

Us Economy ◽

The Us ◽

The Interest Rate ◽

Empirical Implications

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in US GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed. (JEL C11, C32, E12, E23, E32, E43, E52, G01)

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Inflation, interest rate and output gap in the US economy: a vine copula modeling

Journal of Economic Studies ◽

10.1108/jes-12-2015-0231 ◽

2017 ◽

Vol 44 (3) ◽

pp. 412-430

Author(s):

Osvaldo Candido ◽

Jose Angelo Divino

Keyword(s):

Interest Rate ◽

Conditional Expectation ◽

Output Gap ◽

Multivariate Distributions ◽

Content Type ◽

Us Economy ◽

Copula Modeling ◽

The Us ◽

The Interest Rate ◽

Vine Copula

Purpose The purpose of this paper is to investigate the relationship between inflation, interest rate, and output gap in the US economy in the post Second World War period, without assuming any structure nor imposing any restriction on that relationship. Design/methodology/approach The authors apply vine copula modeling to investigate asymmetry and tail behavior on both conditional and unconditional dependence among those variables. The dependence parameter is allowed to evolve over time according to a stochastic autoregressive processes. Additionally, a conditional expectation based on vine copula is used to analyze the conditional expectation of interest rate. Findings The results suggest that the joint distribution, both conditional and unconditional, of the interest rate and inflation is asymmetric to the left, while the pair interest rate and output gap have symmetrical distributions coupled with low persistence and high volatility. Besides the unquestionable evidence that the US monetary policy has been mostly focused on inflation stabilization, there is also indication of nonlinearity in the conditional expected interest rate and asymmetric behavior by the Federal Reserve in the long run. Originality/value The vine copula modeling allows for several forms of asymmetries and tail dependence, which is a flexible modeling strategy for multivariate distributions. Moreover, the conditional expectation implied by vine copulas is suitable to account for nonlinearity in the interest rate conditional on inflation and output gap.

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