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Technology shocks and business cycles in India.

Banerjee, S. and Basu, P. (2019) 'Technology shocks and business cycles in India.', Macroeconomic dynamics., 23 (5). pp. 1721-1756.


In this paper, we develop a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model to understand the relative importance of two key technology shocks, Hicks neutral total factor productivity (TFP) shock and investment specific technology (IST) shock for an emerging market economy like India. In addition to these two shocks, our model includes three demand side shocks such as fiscal spending, home interest rate, and foreign interest rate. Using a Bayesian approach, we estimate our DSGE model with Indian annual data for key macroeconomic variables over the period of 1971–2010, and for subsamples of pre-liberalization (1971–1990) and post-liberalization (1991–2010) periods. Our study reveals three main results. First, output correlates positively with TFP, but negatively with IST. Second, TFP and IST shocks are the first and the second most important contributors to aggregate fluctuations in India. In contrast, the demand side disturbances play a limited role. Third, although TFP plays a major role in determining aggregate fluctuations, its importance vis-à-vis IST has declined during the post liberalization era. We find that structural shifts of nominal friction and relative home bias for consumption to investment in the post-liberalization period can account for the rising importance of the IST shocks in India.

Item Type:Article
Full text:(AM) Accepted Manuscript
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Publisher statement:This article has been published in a revised form in Macroeconomic Dynamics This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Cambridge University Press 2017.
Date accepted:25 April 2017
Date deposited:27 April 2017
Date of first online publication:26 July 2017
Date first made open access:27 April 2017

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