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Separating shocks from cyclicality in Indian aggregate supply

Author

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Shruthi Tripathi

    (Indira Gandhi Institute of Development Research)

Abstract

Simultaneity issues as well as incorrect measurement of shocks and of the cyclical variable bias estimated slopes of the Indian aggregate supply curve (AS). Our initial Generalized Method of Moments estimation, based on a filtered output gap variable and including supply shocks, also gives an unrealistic downward sloping AS. But we find measures of asymmetries in price changes outperform traditional measures of supply shocks. Estimation using marginal costs as a proxy for the output gap gives a positive coefficient that reduces in size on including our comprehensive supply shock variable, implying the correct AS has a small positive slope, but is subject to multiple shifts. The semi-structural specification, closer to firms' actual decisions, gives estimates of structural parameters such as degree of price stickiness and extent of forward-looking price adjustment. The results more correctly separate shocks from cyclicality, help to interpret India's growth and inflation experience, and have implications for policy.

Suggested Citation

  • Ashima Goyal & Shruthi Tripathi, 2015. "Separating shocks from cyclicality in Indian aggregate supply," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-006, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2015-006
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    References listed on IDEAS

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    Cited by:

    1. Ashima Goyal, 2016. "Abductive Reasoning in Macroeconomics," Working Papers id:11272, eSocialSciences.
    2. Ashima Goyal & Sritama Ray, 2022. "Exploring correlations between aggregate demand and supply shocks in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-004, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Taniya Ghosh & Sohini Sahu & Siddhartha Chattopadhyay, 2017. "Households' Inflation Expectations in India: Role of Economic Policy Uncertainty and Global Financial Uncertainty Spill-over," Working Papers id:11890, eSocialSciences.
    4. Goyal, Ashima & Kumar, Abhishek, 2018. "Money and business cycle: Evidence from India," The Journal of Economic Asymmetries, Elsevier, vol. 18(C), pages 1-1.
    5. Szafranek, Karol, 2017. "Flattening of the New Keynesian Phillips curve: Evidence for an emerging, small open economy," Economic Modelling, Elsevier, vol. 63(C), pages 334-348.
    6. Harendra Behera & Garima Wahi & Muneesh Kapur, 2017. "Phillips Curve Relationship in India: Evidence from State-Level Analysis," Working Papers id:11973, eSocialSciences.
    7. Ashima Goyal & Abhishek Kumar, 2022. "News, noise, and Indian business cycle," Bulletin of Economic Research, Wiley Blackwell, vol. 74(2), pages 503-538, April.
    8. Bhavesh Salunkhe & Anuradha Patnaik, 2019. "Inflation Dynamics and Monetary Policy in India: A New Keynesian Phillips Curve Perspective," South Asian Journal of Macroeconomics and Public Finance, , vol. 8(2), pages 144-179, December.
    9. Ashima Goyal, 2018. "The Indian fiscal-monetary framework: Dominance or coordination?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-010, Indira Gandhi Institute of Development Research, Mumbai, India.
    10. 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.
    11. Taniya Ghosh & Sohini Sahu & Siddhartha Chattopadhyay, 2021. "Inflation expectations of households in India: Role of oil prices, economic policy uncertainty, and spillover of global financial uncertainty," Bulletin of Economic Research, Wiley Blackwell, vol. 73(2), pages 230-251, April.
    12. Ashima Goyal, 2016. "Unconventional monetary policy in emerging markets," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(2), pages 101-108, July.
    13. Yoshino, Naoyuki & Paramanik, Rajendra N & Gopakumar, K U & Taghizadeh-Hesary, Farhad & Revilla, Ma. Laarni & Seetha Ram, K E, 2020. "An Aggregate-Level Macro Model for the Indian Economy," ADBI Working Papers 1201, Asian Development Bank Institute.
    14. Holtemöller, Oliver & Mallick, Sushanta, 2016. "Global food prices and monetary policy in an emerging market economy: The case of India," Journal of Asian Economics, Elsevier, vol. 46(C), pages 56-70.
    15. Ashima Goyal & Gagan Goel, 2021. "Correlated Shocks, Hysteresis, and the Sacrifice Ratio: Evidence from India," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(10), pages 2929-2945, August.
    16. Goyal, Ashima & Arora, Sanchit, 2016. "Estimating the Indian natural interest rate: A semi-structural approach," Economic Modelling, Elsevier, vol. 58(C), pages 141-153.

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    More about this item

    Keywords

    Indian aggregate supply; slope; shocks; firms' price-setting; marginal costs;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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