Estimating the Indian natural interest rate and evaluating policy
AbstractWe estimate the unobserved time-varying natural interest rate (NIR) and potential output for the Indian economy using the Kalman Filter. Estimation is a special challenge in an emerging market because of limited length of data series and ongoing structural change. A key result in the literature is the NIR is imprecisely estimated. Structural aspects of the economy used in our estimation turn out, however, to improve the precision of the NIR estimates, although potential output continues to be imprecisely estimated. Turning points are well captured and estimates obtained for the output gap elasticity of aggregate supply and the interest elasticity of aggregate demand.The estimated NIR is used as an indicator of the monetary policy stance, which is found to be broadly contractionary and procyclical for the period under study.
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Bibliographic InfoPaper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2013-017.
Length: 28 pages
Date of creation: Sep 2013
Date of revision:
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More information through EDIRC
Natural interest rate; potential output; Kalman filter; monetary policy;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-11 (All new papers)
- NEP-MAC-2013-10-11 (Macroeconomics)
- NEP-MON-2013-10-11 (Monetary Economics)
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