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Indian Economy During the Era of Quantitative Easing: A Dynamic Stochastic General Equilibrium Perspective

Banerjee, Shesadri; Basu, Parantap

Authors

Shesadri Banerjee



Contributors

Chetan Ghate
Editor

Kenneth M. Kletzer
Editor

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.

Citation

Banerjee, S., & Basu, P. (2016). Indian Economy During the Era of Quantitative Easing: A Dynamic Stochastic General Equilibrium Perspective. In C. Ghate, & K. M. Kletzer (Eds.), Monetary policy in India : a modern macroeconomic perspective (549-580). Springer Verlag. https://doi.org/10.1007/978-81-322-2840-0_17

Acceptance Date Apr 1, 2016
Online Publication Date Nov 25, 2016
Publication Date Nov 25, 2016
Deposit Date Apr 5, 2016
Publicly Available Date Mar 28, 2024
Publisher Springer Verlag
Pages 549-580
Book Title Monetary policy in India : a modern macroeconomic perspective.
ISBN 9788132228387
DOI https://doi.org/10.1007/978-81-322-2840-0_17
Public URL https://durham-repository.worktribe.com/output/1643011