Saurabh Sharma and Harendra Behera 19 th Macroeconomic and Finance Conference 2021 IGIDR Mumbai Scheme of Presentation Motivation Concepts Model Results Discussion Motivation Appraisal of Indian growth experience using a DSGE filter ID: 921261
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Slide1
A Dissection of Indian Growth Using a DSGE Filter
Saurabh Sharma and Harendra Behera
19
th
Macroeconomic and Finance Conference, 2021
IGIDR, Mumbai
Slide2Scheme of Presentation
Motivation
Concepts
Model
Results
Discussion
Slide3Motivation
Appraisal of Indian growth experience using a DSGE filter.
Possible drivers of macroeconomic fluctuations.
Recent growth slowdown: structural or cyclical
Slide4Concepts
Macroeconomic data e.g. GDP
non-stationary long run trend (potential output)
a stationary cyclical component (output gap)
Traditional methods
Statistical filters (Band-pass, HP)
Unobserved component model
In this paper DSGE filter
Slide5Concepts
DSGE structure
Stationary shocks (real and nominal)
Non-stationary shocks
Sources of unit root shocks
Production function
Investment specific technical efficiency
Slide6Demeaned ratios
Slide7Concepts
Two estimates of potential output (and corresponding gap)
Short-run efficient output
Without nominal shocks
Price flexibility
Long-run efficient output
Non-stationary shocks
Slide8Model: Structure (three blocks)
Household
Supply labour and capital service; earn wages and rents; save in bonds or capital; decide the intensity of capacity utilization
Their decision about how much to save in capital determines the investment level in the economy.
Firms
Intermediate-goods producing firms combine labour and capital service as per CRS technology
Final-goods producing firms combine the produce of intermediate firms according to standard Dixit-Stiglitz aggregation, which is then sold to the households.
Central Bank and Government
Exogenous government expenditure
Central bank: Taylor-type rule for nominal policy interest rate
Slide9Model: Estimation
Data: 1996:Q2 to 2020:Q1
Bayesian maximum likelihood estimation
Slide10Results
Slide11Estimates from Model 1
Slide12Estimated parameters
Slide13Variance decomposition
Slide14Different estimates of Potential Output
Slide15Comparison of Long-run efficient output with HP-filtered Output
Slide16Gap from Long-run Efficient Output and Gap from Short-run Efficient Output
Slide17Gap from Long-run Efficient Output and Gap from HP-filtered Output
Slide18Comparison of Model-based Measure with survey -based (OBICUS) Measure of Capacity Utilisation
Slide19The case for including IST shocks
Slide20Demeaned Estimates
Slide21Ratio of Investment Deflator to Consumption Deflator
Slide22Estimates from Model 2 (after incorporation of IST Shocks)
Slide23Potential Growth Based on Short-run and Long-run Efficient Output
Slide24Comparison between Long-run Efficient Output: Model 1
vs.
Model 2
Slide25Decomposition of Potential Output: Contributions from Neutral, IST and Population Growth
Slide26Estimates of Neutral Growth and IST Growth
Slide27What has driven Business Cycle in India?
Slide28Inflation forecasting
Comparing the bivariate models of output gap and inflation.
Slide29Analysis of Forecast Accuracy
Slide30Observations
Potential growth in India witnessed a sustained increase from 2002 to 2007 and remained subdued thereafter.
The sudden uptick (2002 onwards) in potential growth is mainly driven by neutral growth.
Initially, IST growth appears to be following neutral growth.
Since mid-2016, a combined deceleration in neutral and IST growth has steadily brought down the potential growth.
A sharp downturn since 2018 in business cycle due to weak demand and
unfavourable
investment-adjustment shocks.
Y-
ngap from Model 1 is a competing predictor of inflation than HP-filtered output gap and the baseline AR model at all horizons.
Slide31Discussion
The economic deceleration that had started even before the advent of the pandemic in India, can be attributed to structural as well as cyclical factors.
Slide32Thank You /
Dhanyawaad
!
Slide33Appendix
Slide34Productivity Shock
Slide35Consumption Demand Shock
Slide36Fiscal Shock
Slide37Price Mark-up Shock
Slide38Investment adjustment Cost Shock
Slide39Monetary Policy Shock
Slide40Model: Households
Household
maximises
their life-time utility:
Budget constraint
Law of motion of capital
w where,
Slide41Model: Firms
Each monopolistically competitive intermediate firm faces a downward-sloping demand curve for its differentiated product
:
where
is the stationary productivity shock;
is permanent labour- augmenting growth factor.
The firm
maximises
profit by
minimising cost and setting an optimal price for given demand constraint and
Slide42Model: Final-goods Firm
The final goods producing firm combines these intermediate goods into final goods,
Philips curve equation for inflation,
Slide43Government
Fiscal authority issues bonds and raises lump-sum taxes to meet the expenditure on goods and services (Gt) according to the budget constraint:
Central bank sets gross interest rate (
) as per a Taylor-type rule,