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Estimating the Indian natural interest rate and evaluating policy

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  • Ashima Goyal

    ()
    (Indira Gandhi Institute of Development Research)

  • Sanchit Arora

    ()
    (Indira Gandhi Institute of Development Research)

Abstract

We 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 Info

Paper 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.

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Length: 28 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:ind:igiwpp:2013-017

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Keywords: Natural interest rate; potential output; Kalman filter; monetary policy;

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  1. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
  2. Ashima Goyal, 2008. "The Natural interest rate in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2008-014, Indira Gandhi Institute of Development Research, Mumbai, India.
  3. Ashima Goyal & Sanchit Arora, 2012. "Deriving India's Potential growth from theory and structure," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2012-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  4. Ashima Goyal, 2007. "A General equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2007-016, Indira Gandhi Institute of Development Research, Mumbai, India.
  5. Ashima Goyal & Shruti Tripathi, 2011. "New Keynesian aggregate supply in the tropics: food prices, wages and inflation," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 4(4), pages 330-354.
  6. Jean-Stephane Mesonnier & Jean-Paul Renne, 2004. "A Time Varying Natural Rate of Interest for the Euro Area," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 42, Money Macro and Finance Research Group.
  7. Michel Juillard & Charles Freedman & Dmitry Korshunov & Douglas Laxton & Ondra Kamenik & Ioan Carabenciov & Igor Ermolaev & Jared Laxton, 2008. "A Small Quarterly Multi-Country Projection Model with Financial-Real Linkages and Oil Prices," IMF Working Papers, International Monetary Fund 08/280, International Monetary Fund.
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