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News, noise and Indian business cycle

Author

Listed:
  • Ashima Goyal

    () (Indira Gandhi Institute of Development Research)

  • Abhishek Kumar

    () (Indira Gandhi Institute of Development Research)

Abstract

New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models with various specifications oftechnology, markup and interest rate shocks are estimated with Indian data using Kalman filter basedpure and Bayesian likelihood estimation. Preference and interest rate shocks are found to be importantfor output determination whereas markup and interest rate shocks are important for inflation. News,such as contained in stock market variables and arising from anticipated interest rates, affects growth ofgross domestic product. Interest rate shock is anticipated at horizon of one quarter and out of totalvariance explained by interest rate shock, one third is due to the anticipated shock. Anticipated interestrate shock diminishes the role of preference shock in output determination. Markup shock has a largeshare, very low persistence but is correlated. There is evidence that permanent component of technologyis not well anticipated, and once we incorporate that technology shocks become more important fordetermination of output although it still remains much below US levels. Implications for policy aredrawn out.

Suggested Citation

  • Ashima Goyal & Abhishek Kumar, 2019. "News, noise and Indian business cycle," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-010, Indira Gandhi Institute of Development Research, Mumbai, India.
  • Handle: RePEc:ind:igiwpp:2019-010
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    DSGE; India; News; Noise; Technology Shock; Learning; Anticipated Shocks; Kalman Filter; Maximum Likelihood; Inflation; Monetary Policy;

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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