News, noise, and Indian business cycle

Goyal, Ashima and Kumar, Abhishek (2022) News, noise, and Indian business cycle. Bulletin of Economic Research, 74 (2), 503-538. (doi:10.1111/boer.12306).

Record type: Article

Abstract

New Keynesian dynamic stochastic general equilibrium 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, 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 share of preference shock in output determination. Although markup shock has a large share, its persistence is low. There is evidence that permanent component of technology is not well anticipated. Once we incorporate this, technology shocks affect output more, although they still remain much below US levels. Implications for policy include forward guidance on interest rates, less reaction to short-term supply shocks, and allowing technology shocks to play out.

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