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An Estimated DSGE Model of the Indian Economy

We develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian Maximum Likelihood methods using Dynare. We build up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward and backward-looking components. We find that, in terms of model posterior probabilities and standard moments criteria, inclusion of the above financial frictions and an informal sector significantly improves the model fit.

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File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2010/NIPE_WP_29_2010.pdf
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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 29/2010.

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Date of creation: 2010
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Handle: RePEc:nip:nipewp:29/2010
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
Phone: +351-253604510 ext 5532
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Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
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  1. Michael B. Devereux & Philip Lane, 2001. "Exchange Rates and Monetary Policy in Emerging Market Economies," CEG Working Papers 20017, Trinity College Dublin, Department of Economics.
  2. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
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  6. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries; Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
  7. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
  8. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  9. Ferroni, Filippo, 2009. "Trend agnostic one step estimation of DSGE models," MPRA Paper 14550, University Library of Munich, Germany.
  10. Paul Levine & Joseph Pearlman & Nicoletta Batini, 2009. "Monetary and Fiscal Rules in an Emerging Small Open Economy," IMF Working Papers 09/22, International Monetary Fund.
  11. Andrle, Michal, 2008. "The Role of Trends and Detrending in DSGE Models," MPRA Paper 13289, University Library of Munich, Germany.
  12. Gabriel, Vasco J. & Levine, Paul & Spencer, Christopher, 2009. "How forward-looking is the Fed? Direct estimates from a 'Calvo-type' rule," Economics Letters, Elsevier, vol. 104(2), pages 92-95, August.
  13. Paul Levine & Emanuela Lotti & Nicoletta Batini & Young-Bae Kim, 2010. "Informal Labour and Credit Markets: A Survey," IMF Working Papers 10/42, International Monetary Fund.
  14. David N. DeJong & Chetan Dave, 2007. "Introduction to Structural Macroeconometrics
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  15. Codrina Rada, 2009. "Formal and Informal Sectors in China and India: An Accounting-Based Approach," Working Paper Series, Department of Economics, University of Utah 2009_02, University of Utah, Department of Economics.
  16. Vasco Cúrdia, 2007. "Monetary policy under sudden stops," Staff Reports 278, Federal Reserve Bank of New York.
  17. Cook, David, 2004. "Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1155-1181, September.
  18. Jesús Fernández-Villaverde, 2009. "The Econometrics of DSGE Models," PIER Working Paper Archive 09-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  19. John Geweke, 1999. "Computational Experiments and Reality," Computing in Economics and Finance 1999 401, Society for Computational Economics.
  20. Nicoletta Batini & Vasco Gabriel & Paul Levine & Joseph Pearlman, 2010. "A Floating versus Managed Exchange Rate Regime in a DSGE Model of India," Macroeconomics Working Papers 21992, East Asian Bureau of Economic Research.
  21. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  22. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," CEPR Discussion Papers 6027, C.E.P.R. Discussion Papers.
  23. Simon Gilchrist, 2003. "Financial Markets and Financial Leverage in a Two-Country World-Economy," Working Papers Central Bank of Chile 228, Central Bank of Chile.
  24. David N. DeJong & Chetan Dave, 2007. "Implementing Nonlinear Appoximations Empirically, from Structural Macroeconometrics
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    ," Introductory Chapters, Princeton University Press.
  25. Paul Levine & Joseph Pearlman & George Perendia, 2007. "Estimating DSGE Models under Partial Information," School of Economics Discussion Papers 1607, School of Economics, University of Surrey.
  26. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November.
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