S. Banerjee
Technology Shocks and Business Cycles in India
Banerjee, S.; Basu, P.
Abstract
In this paper, we develop a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model to understand the relative importance of two key technology shocks, Hicks neutral total factor productivity (TFP) shock and investment specific technology (IST) shock for an emerging market economy like India. In addition to these two shocks, our model includes three demand side shocks such as fiscal spending, home interest rate, and foreign interest rate. Using a Bayesian approach, we estimate our DSGE model with Indian annual data for key macroeconomic variables over the period of 1971–2010, and for subsamples of pre-liberalization (1971–1990) and post-liberalization (1991–2010) periods. Our study reveals three main results. First, output correlates positively with TFP, but negatively with IST. Second, TFP and IST shocks are the first and the second most important contributors to aggregate fluctuations in India. In contrast, the demand side disturbances play a limited role. Third, although TFP plays a major role in determining aggregate fluctuations, its importance vis-à-vis IST has declined during the post liberalization era. We find that structural shifts of nominal friction and relative home bias for consumption to investment in the post-liberalization period can account for the rising importance of the IST shocks in India.
Citation
Banerjee, S., & Basu, P. (2019). Technology Shocks and Business Cycles in India. Macroeconomic Dynamics, 23(5), 1721-1756. https://doi.org/10.1017/s1365100517000438
Journal Article Type | Article |
---|---|
Acceptance Date | Apr 25, 2017 |
Online Publication Date | Jul 26, 2017 |
Publication Date | Jul 31, 2019 |
Deposit Date | Apr 26, 2017 |
Publicly Available Date | Apr 27, 2017 |
Journal | Macroeconomic Dynamics |
Print ISSN | 1365-1005 |
Electronic ISSN | 1469-8056 |
Publisher | Cambridge University Press |
Peer Reviewed | Peer Reviewed |
Volume | 23 |
Issue | 5 |
Pages | 1721-1756 |
DOI | https://doi.org/10.1017/s1365100517000438 |
Public URL | https://durham-repository.worktribe.com/output/1380688 |
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Copyright Statement
This article has been published in a revised form in Macroeconomic Dynamics https://doi.org/10.1017/S1365100517000438. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Cambridge University Press 2017.
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