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Indian And New Keynesian DSGE Models

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The application of DSGE models in India has largely remained theoretic in terms of macroeconomic analysis and forecasting but it is gradually improving, but it is quite evident in developed countries. Some of the studies on DSGE modelling for India are discussed below.

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The role of balance sheets in the transposal of shocks to the Indian economy was examined by Anand et al., (2010). A meager uncluttered economy model with financial accelerator was developed where firms are able to borrow in both domestic and foreign medium of exchange. The effect of commercial frictions on the actual economy were studied with the help of financial accelerator. In addition, the conduct of monetary policy was analyzed.

A combination of a freely floating exchange estimate, an explicit target for inflation over the medium run, and a mechanism are considered to be the three pillars macro- economic policy framework which were studied by Levine and Pearlman (2010) using a DSGE model. It ensured a stable government debt to GDP ratio around a specified long run. The price of buyer goods and the exchange rate were found to be proportional to each other in this model. The salient feature of this model was the ability to accommodate specific features of emerging market small open economies (SOEs) like India.

New Keynesian frictions such as imperfect competition, sticky price, investment adjustment cost, credit-constrained consumers, and the financial accelerator facing domestic firms seeking to finance their investment were thoroughly studied by Gabriel et al., (2010). They developed a closed economy DSGE model and estimated that by Bayesian Maximum Likelihood estimation technique.

The effect of economic approach shock in a New Keynesian DSGE model with dualistic labor markets was studied by Goyal (2011). It observed that consumer price targeting performs better when combined with some kind of managed floating as well as the flexible domestic hike targeting produces the lowest volatility. The business cycle features of consumption volatility for India were addressed by Bhattacharya and Pattnaiyk (2012).

It was observed that the comparison of parameters in a New Keynesian model, impulse response and forecast error variance decomposition between India and United States points to interesting difference in the structure of two economics and in their inflationary process by Goyal (2016). This suggested that the value of habit endurance is proportional to volatile markup and interest estimate collapse in India. Also the impulse responses suggest higher impact of interest estimate shock on output and inflation whereas the technology collapse has less effect on output in comparison to the US.

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