IGIDR WORKING PAPER:News, Noise and Indian Business Cycle

NO : WP-2019-010

AUTHOR : Ashima Goyal and Abhishek Kumar

TITLE : News, Noise and Indian Business Cycle


New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models with various specifications of
technology, markup and interest rate shocks are estimated with Indian data using Kalman filter based
pure and Bayesian likelihood estimation. Preference and interest rate shocks are found to be important
for output determination whereas markup and interest rate shocks are important for inflation. News,
such as contained in stock market variables and arising from anticipated interest rates, affects growth of
gross domestic product. Interest rate shock is anticipated at horizon of one quarter and out of total
variance explained by interest rate shock, one third is due to the anticipated shock. Anticipated interest
rate shock diminishes the role of preference shock in output determination. Markup shock has a large
share, very low persistence but is correlated. There is evidence that permanent component of technology
is not well anticipated, and once we incorporate that technology shocks become more important for
determination of output although it still remains much below US levels. Implications for policy are
drawn out

Keywords:JEL Code :  E31; E32; E52; E57

Weblink :http://www.igidr.ac.in/pdf/publication/WP-2019-010.pdf