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Role of IST and TFP Shocks in Business Cycle Fluctuations: The Case of India

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  • Parantap Basu

    (Durham University, Durham University Business School)

  • Shesadri Banerjee

    (National Council of Applied Economic Research (NCAER))

Abstract

A striking stylized fact of the Indian economy is the increasing predominance of the investment specific technology shocks (IST) as opposed to total factor productivity (TFP) shocks in determining the GDP fluctuations during the post liberalization era. A concurrent phenomenon is the stark increase in the relative import content in the consumption basket vis-a-vis investment. We develop an open economy dynamic stochastic general equilibrium (DSGE) model to understand the determinants of the relative importance of IST and TFP shocks. The model has standard frictions which include price stickiness, external habit formation, investment adjustment cost, and transaction cost of foreign bond holding. We find that the relative share of import content in consumption over investment and nominal friction are crucial determinants of the relative importance of these two technology shocks.

Suggested Citation

  • Parantap Basu & Shesadri Banerjee, 2015. "Role of IST and TFP Shocks in Business Cycle Fluctuations: The Case of India," CEGAP Working Papers 2015_04, Durham University Business School.
  • Handle: RePEc:dur:cegapw:2015_04
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    Keywords

    Business cycles; IST and TFP Shocks; DSGE Modelling.;
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