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An Estimated DSGE Model of the Indian Economy

  • Vasco Gabriel

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

  • Bo Yang

    (University of Surrey and London Metropolitan University)

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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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1210.

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Length: 55 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:sur:surrec:1210
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