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Indian economy during the era of quantitative easing : a dynamic stochastic general equilibrium perspective.

Banerjee, Shesadri and Basu, Parantap (2016) 'Indian economy during the era of quantitative easing : a dynamic stochastic general equilibrium perspective.', in Monetary policy in India : a modern macroeconomic perspective. Cham: Springer, pp. 549-580.

Abstract

The effect of external Quantitative Easing (QE) on a small open economy like India is analyzed using a dynamic stochastic general equilibrium (DSGE) model. The modeling is motivated by some broad empirical regularities of the Indian economy during the pre and post-QE periods . QE is modeled as a negative shock to the short term foreign policy rate with a mean reverting pattern. The mean reversion reflects the phasing out of the QE operation. In addition, we analyze the “news” effect of the tapering out phase of QE. Our model has standard real and nominal frictions as in any New Keynesian model. Monetary policy is modeled by the forward looking inflation targeting Taylor rule . We show that the impact and news effects of QE work through this terms of trade via the uncovered interest parity condition. Using our DSGE model, we also compare the effect of a QE shock with a domestic fiscal spending shock. The model impulse response functions qualitatively support some key empirical regularities of the Indian economy during the QE era.

Item Type:Book chapter
Full text:Publisher-imposed embargo
(AM) Accepted Manuscript
File format - PDF (Copyright agreement prohibits open access to the full-text)
(356Kb)
Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1007/978-81-322-2840-0_17
Record Created:05 Apr 2016 14:35
Last Modified:22 Dec 2016 14:06

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