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Technology Shocks And Business Cycles In India

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  • Banerjee, Shesadri
  • Basu, Parantap

Abstract

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.

Suggested Citation

  • Banerjee, Shesadri & Basu, Parantap, 2019. "Technology Shocks And Business Cycles In India," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1721-1756, July.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:05:p:1721-1756_00
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    Cited by:

    1. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Identifying efficient policy mix under different targeting regimes: A tale of two crises," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 975-994.
    2. Bahl, Ojasvita & Ghate, Chetan & Mallick, Debdulal, 2020. "Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents," MPRA Paper 101651, University Library of Munich, Germany.
    3. Ginn, William & Pourroy, Marc, 2022. "The contribution of food subsidy policy to monetary policy in India," Economic Modelling, Elsevier, vol. 113(C).
    4. Kshitiz Mishra & Partha Chatterjee, 2021. "Monetary Business Cycle Accounting Analysis of Indian Economy," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(3), pages 471-491, September.
    5. Kumar, Alok, 2023. "Financial market imperfections, informality and government spending multipliers," Journal of Development Economics, Elsevier, vol. 163(C).
    6. William Ginn & Marc Pourroy, 2022. "The Contribution of Food Subsidy Policy to Monetary Policy in India," Working Papers hal-02944209, HAL.
    7. Shesadri Banerjee & Jayanthi K. Anand & Shashanka Bhide, 2021. "Estimation of Macro-financial Linkages for the Indian Economy," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 20(1), pages 7-47, April.
    8. Bhattarai, Keshab & Mallick, Sushanta K. & Yang, Bo, 2021. "Are global spillovers complementary or competitive? Need for international policy coordination," Journal of International Money and Finance, Elsevier, vol. 110(C).
    9. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    10. Ghosh, Saurabh & Gopalakrishnan, Pawan & Ranjan, Abhishek, 2022. "Technology shocks, banking sector policy, and the trade-off between firms and households," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 664-688.
    11. Chetan Ghate & Pawan Gopalakrishnan & Anuradha Saha, 2023. "The Great Indian Savings Puzzle," IEG Working Papers 459, Institute of Economic Growth.
    12. Ashima Goyal & Abhishek Kumar, 2020. "A DSGE Model-Based Analysis of the Indian Slowdown," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-38, April.
    13. Ma, Yong & Lv, Lin, 2022. "Money, debt, and the effects of fiscal stimulus," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 152-178.
    14. Goyal, Ashima & Kumar, Abhishek, 2021. "Asymmetry, terms of trade and the aggregate supply curve in an open economy model," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).

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