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Separating shocks from cyclicality in Indian aggregate supply

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  • Goyal, Ashima
  • Tripathi, Shruti

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 Generalised 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

  • Goyal, Ashima & Tripathi, Shruti, 2015. "Separating shocks from cyclicality in Indian aggregate supply," Journal of Asian Economics, Elsevier, vol. 38(C), pages 93-103.
  • Handle: RePEc:eee:asieco:v:38:y:2015:i:c:p:93-103
    DOI: 10.1016/j.asieco.2015.03.005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. 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.
    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. Harendra Behera & Garima Wahi & Muneesh Kapur, 2017. "Phillips Curve Relationship in India: Evidence from State-Level Analysis," Working Papers id:11973, eSocialSciences.
    5. 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.
    6. Ashima Goyal, 2016. "Abductive reasoning in macroeconomics," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-022, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Goyal, Ashima & Arora, Sanchit, 2016. "Estimating the Indian natural interest rate: A semi-structural approach," Economic Modelling, Elsevier, vol. 58(C), pages 141-153.
    8. Ashima Goyal & Abhishek Kumar, 2018. "Money and business cycle: Evidence from India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-020, Indira Gandhi Institute of Development Research, Mumbai, India.
    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.

    More about this item

    Keywords

    Indian aggregate supply; Slope; Shocks; Firms’ price-setting; Marginal costs;

    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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