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Deriving India's Potential growth from theory and structure

  • Ashima Goyal

    ()

    (Indira Gandhi Institute of Development Research)

  • Sanchit Arora

    ()

    (Indira Gandhi Institute of Development Research)

Estimates suggest that Indian aggregate supply is elastic but subject to upward shocks. If supply shocksmake a high persistent contribution to inflation, it implies second round pass through is occurring, implying growth has reached its potential. This measure of potential growth draws on both theory and the structure of the Indian economy. It turns out supply shocks largely explain inflation. Output reached potential only in the years 2007-08 when growth rates exceeded 9 percent. In the period 2010-11 there was no sustained excess of growth over potential. Inflation was due to multiple supply shocks, rather than second round effects. Estimated linear and Markov switching policy rules suggest there wasovercorrection in 2011.They show a two percent underestimate of potential output leads to a 50 basis point rise in policy rates.

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File URL: http://www.igidr.ac.in/pdf/publication/WP-2012-018.pdf
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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 2012-018.

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Length: 30 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:ind:igiwpp:2012-018
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  1. Ashima Goyal & Arjun Singh, 2006. "Through a glass darkly: Deciphering the impact of oil price shocks," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2006-012, Indira Gandhi Institute of Development Research, Mumbai, India.
  2. Hilde Bjørnland & Leif Brubakk & Anne Jore, 2008. "Forecasting inflation with an uncertain output gap," Empirical Economics, Springer, vol. 35(3), pages 413-436, November.
  3. Goyal, Ashima & Pujari, Ayan Kumar, 2005. "Identifying long run supply curve of India," MPRA Paper 24021, University Library of Munich, Germany.
  4. Ashima Goyal, 2007. "A General Equilibrium Open Economy Model for Emerging Markets - Monetary Policy with a Dualistic Labor Market," Macroeconomics Working Papers 22377, East Asian Bureau of Economic Research.
  5. Ashima Goyal & Shruti Tripathi, 2012. "Stability and policy rules in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-004, Indira Gandhi Institute of Development Research, Mumbai, India.
  6. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-53, July.
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