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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 fac...
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... further illustrate how the estimated models capture the data statistics, we plot the unconditional autocorrelations of the actual data and those of the endogenous variables generated by the model variants in Figure 9. In general, all models match reasonably well the autocorrelations of output, interest rate and investment shown in the data within a shorter period horizon. ...
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Citations
... The HP filter is used to detrend the data into a cyclical stationary component(Hodrick and Prescott, 1997). The trend is based on = 129,600, a standard value for data at monthly frequency (see e.g.Ravn and Uhlig (2002)) 5 For India, the interest rate is based on the 90 day Treasury Bill interest rate (e.g.,Patnaik et al., 2011, Gabriel et al., 2012, Saxegaard et al., 2010, Anand et al., 2014, Ginn and Pourroy, 2020. ...
The COVID-19 pandemic and its aftermath exposed the vulnerabilities of global supply chains, leading to widespread delays and shortages that highlighted the interconnectedness of economies. This paper examines the global impact of supply chain disruptions on economic conditions, drawing on literature related to economic uncertainty, global economic integration, and the global supply chain disruptions. Using a Bayesian Vector Autoregression (BVAR) model, we analyze the effect of supply chain shocks. The empirical findings reveal that these disruptions significantly influence global economic stability, particularly through their impact on aggregate inflation and the policy responses that accompanies them.
... A large literature on emerging market and developing economies (EMDEs) using Dynamic Stochastic General Equilibrium (DSGE) models highlights the importance of informal labour markets in shaping business cycles. 1 While DSGE models are increasingly being used to study business cycles in the Indian economy (Gabriel et al., 2012(Gabriel et al., , 2016Ghate et al., 2018;Banerjee and Basu, 2019;Banerjee et al., 2020;Kumar, 2023), many of these models are constructed without reference to labour markets because of the lack of a comprehensive data set on formal and informal labour market indicators. 2 ...
... 4 Figure 1 shows that self-employment dominates the total employment structure. Over time, 1 See Alberola and Urrutia (2020) and the references therein. 2 Gabriel et al. (2012) and Banerjee et al. (2020) treat as a rule of thumb consumers as informal workers. The lack of labour market indicators means that the output gap is usually used as a measure of slack. ...
How does informality in labour markets affect inflation stabilisation and monetary policy setting by central banks? To address this, we build a medium-scale NK-DSGE model with segmented labour markets. We introduce search and matching frictions in both formal jobs as well as in informal casual jobs. We calibrate the model to India. As in the data, our model is able to replicate the impact of a contractionary monetary policy shock on lower output and inflation via higher formal and informal unemployment. As a counterfactual exercise, when we increase the magnitude of formality, we show that the impact of a contractionary monetary policy shock leads to a larger impact on inflation, suggesting that monetary policy transmission improves.
... The acceptance ratios are 41% and 42%, respectively. The findings of the study are coherent with the previous findings of Levine, Vasco, and Yang [67] and Banerjee and Basu [68]. ...
This study estimates the monetary policy reaction function (MPRF) in a Dynamic Stochastic General Equilibrium (DSGE) framework using Bayesian analysis for the emerging economies. DSGE models are suitable for the policy analysis because of their simplicity and prominent role of forward-looking variables. This is a pioneer study investigating the combined effects of credit spreads, fiscal imbalances, and monetary autonomy on interest rates for BRICS member countries. Using real data for the period 1970–2021, the posterior estimates confirm that both credit spread and fiscal imbalance significantly contribute to fluctuations in output, inflation, and interest rates in all the sample economies. The estimates show that fluctuations in the inflation rate are due to supply shocks. The empirical estimates also reveal that fiscal imbalances shock significantly affect output in Brazil, India, and South Africa, whereas, based on real data inflation and interest rate are significantly affected by fiscal imbalance shocks in China and South Africa. Yet, the findings suggest that the effects of various shocks on output and interest rates vary across countries.
... The heterogeneity of the model could be enriched by considering a two-sector economy allowing for informality. Gabriel et al. (2012) study such a model for India and find empirical evidence of a sizeable informal, low-skilled labor intensive sector. Given the significant presence of informality in resource-producing developing countries, the adverse impact of subsidy removal could be felt more by the informal sector. ...
This paper examines the implications of fuel subsidy removal in an oil-producing economy, focusing on the central bank’s response to volatile oil prices. Using a Markov-switching dynamic stochastic general equilibrium model, we analyze the welfare effects of this policy change under different regimes of oil price volatility and monetary policy. Our empirical findings, based on data from Nigeria (2000:2 - 2021:4), reveal time-varying switches in oil price fluctuations and monetary policy adjustments that synchronize with states of high oil price volatility. We also find that subsidy removal has welfare-reducing and heterogenous effects on households, especially when implemented in an environment of heightened volatility. The efficacy of monetary policy in mitigating the impacts of subsidy removal depends on the ability of the central bank to design a flexible framework capable of adapting
to economic shifts, while balancing its stabilization objectives. Furthermore, the observed monetary policy switching endogenous to different states of oil price shocks suggests a need for the central banks of oil-producing emerging economies to consider the prospects of a dual-mandate regime.
... As the production index for China includes missing values, the Kalman smoother using an ARIMA state space representation is used to impute missing values. For India, the interest rate is based on the 90 day Treasury Bill interest rate (e.g., Patnaik et al., 2011, Gabriel et al., 2012, Saxegaard et al., 2010, Anand et al., 2014and Ginn and Pourroy, 2022. ...
El Niño-Southern Oscillation (ENSO) is a major climate phenomenon that influences temperature and precipitation across the globe. We study the effect of changing ENSO patterns on commodity prices using a Global Factor Local Projections (GFALP) model. Firstly, we demonstrate that unanticipated ENSO movements contribute to commodity price volatility asymmetrically during El Niño and La Niña periods. Secondly, climate change might disrupt ENSO patterns. We compare the current situation with potential climate change outcomes to evaluate its impact on commodity price stability. We compute an index measuring commodity price exposure to these disruptions. We demonstrate that in most cases, these shifts exacerbate commodity price volatility. Finally, we explore several avenues to explain the observed heterogeneity in the exposure of commodity prices to the evolution of ENSO that could result from climate change, and we highlight the crucial role of international commodity markets in adapting to climate change.
... As the production index for China includes missing values, the Kalman smoother using an ARIMA state space representation is used to impute missing values.6 For India, the interest rate is based on the 90 day Treasury Bill interest rate (e.g.,Patnaik et al. (2011),Gabriel et al. (2012),Saxegaard et al. (2010),Anand et al. (2014) andGinn and Pourroy (2020a)).7 The GFC dummy variable is set to 1 between 2007:12 to 2009:06, consistent with the NBER recession dates for the U.S. 8 COVID-19 emerged as a pandemic in December 2019 and quickly spread across the world, with far-reaching consequences including higher deaths, stagnation of economic growth and elevated uncertainty, which resulted in lock-downs and other precautions to reduce the spread of the virus. ...
We investigate the role of ENSO climate patterns on global economic conditions. The estimated model is based on a rich and novel monthly dataset for 20 economies, capturing 80.2% of global output (based on IMF data) over the period 1999:01 to 2022:03. The empirical evidence from an estimated global vector autoregression with local projections (GFAVLP) model links an El Niño (EN) shock with higher output and less pronounced inflation, corresponding with lower global economic policy uncertainty (GEPU). A main finding is that an ENSO shock during a La Nina (LN) state elevates food inflation, which can amplify aggregate inflation as a "second-round" effect with ramifications to global economic conditions. Accordingly, an EN (a LN) tends to be associated with higher (lower) output with a limited (higher) impact on aggregate inflation, resulting in a decrease (increase) in GEPU.
... The share of capital in the production function (α) is fixed at 0.33 (see Ginn & Pourroy, 2019). The paper follows Gabriel et al. (2011) and Gabriel et al. (2016) and fix price and wage markups (η p t , η w t ) to 0.14. The calvo parameters (ω P , ω w ) in line with existing literature, have been set to to 0.75. ...
This paper employs the DSGE model with rich fiscal block to examine the asymmetries in the transmission and effectiveness of the government expenditure shock across the active fiscal and passive monetary policy (AFPM) regime and the active monetary and passive fiscal policy (AMPF) regime in the Indian economy. In the AMPF regime, the central bank actively targets inflation, and the fiscal authority ensures public debt sustainability. On the other hand, in the AFPM regime, the central bank weakly targets inflation and stabilizes public debt in the economy. With higher multipliers and debt rollover, the government expenditure stimulus has been more beneficial in the AFPM regime than in the AMPF regime. In the AMPF regime, the central bank has effectively neutralized the inflationary effects of the government expenditure shock. However, this neutralization has weakened the effect of the government expenditure shock on consumption, investment, and output. Based on the findings, the paper suggests the monetary authority to keep its stance accommodative when the fiscal authority injects government expenditure stimulus into the economy.
... They estimate the model using Bayesian for the post-1996 to 2008 data. V. J. Gabriel et al. (2011) build a more Indianised version of the DSGE model by including the informal sector and financial frictions due to the presence of credit-constrained consumers. They find that inclusion of financial friction and informal sector improves the model fit significantly. ...
Indian economy is going through underlying changes in the post-pandemic recovery process. Effects of policies, monetary or fiscal, on macroeconomy need a thorough analysis in these recessionary times. In this context, this study develops a closed-economy DSGE model to see the impact of monetary policy on the Indian economy. The model includes price rigidities, and parameters are calibrated using the data on Indian economy. The model includes two sectors – intermediate goods and final goods producers, an inflation-targeting regime following the Taylor rule. Model is simulated for a positive productivity shock and an expansionary monetary policy shock. Results show that a positive productivity shock improves overall economic activity, and an expansionary monetary policy shock increases output for the short term only.
... As the production index for China includes missing values, the Kalman smoother using an ARIMA state space representation is used to impute missing values. 4 For India, the interest rate is based on the 90 day Treasury Bill interest rate (e.g.,Patnaik et al. (2011), Gabriel et al. (2012,Saxegaard et al. (2010),Anand et al. (2014) andGinn and Pourroy (2020a)).5 The GFC dummy variable is set to 1 between 2007:12 to 2009:06, consistent with the NBER recession dates for the U.S. 6 COVID-19 emerged as a pandemic in December 2019 and quickly spread across the world, with far-reaching consequences including higher deaths, stagnation of economic growth and elevated uncertainty, which resulted in lock-downs and other precautions to reduce the spread of the virus. ...
We investigate the role of ENSO climate patterns on global economic conditions. The estimated model is based on a rich and novel monthly dataset for 20 economies, capturing 80.2% of global output (based on IMF data) over the period 1999:01 to 2022:03. The empirical evidence from an estimated global vector autoregres-sion with local projections (GFAVLP) model links an El Niño (EN) shock with higher output and inflation, corresponding with lower global economic policy uncertainty (GEPU). While a shock to the world oil and food price is inflationary, a food price shock leads to elevated GEPU, more so during a La Nina (LN) shock. A main finding is that an increase of the food price can be a source of global vulnerability. The findings indicate that the weather shock impact on global economic conditions is dependent on the climate state. Our result undermines existing studies connecting climate change and economic damage via statistical approach.
... Tables 1 and 2 report, respectively, calibrated values for the parameters and steady-state values. The values of the parameters are broadly chosen near the values adopted in the literature (Faria-e-Castro, 2021;Harrison, 2010;Smets and Wouters, 2007;Levine et al., 2012). However, specific values are chosen as per the illustrative requirements of the simulations. ...
This paper aims to revisit the theme of fiscal-monetary coordination in a general equilibrium setup that allows for unconventional monetary policy, monetary policy transmission and developing country characteristics. Using a calibrated NK-DSGE model, we find that under high-debt conditions, the inflation-output trade-off rises with an increase in the strictness with which monetary policy targets inflation, undermining the standard prescription of strict inflation targeting. At the same time, the transmission of monetary policy is also impeded, due to which unconventional monetary policy becomes more appropriate. The need for coordination among the policies gets enhanced in the presence of borrowing cost channel. While the presence of borrowing cost channel increases the need for policy coordination regardless of the debt situation, features like higher share of non-Ricardian households and weaker monetary policy
transmission affect monetary-fiscal interaction to a greater extent under high-debt environment.
