An Estimated DSGE Model of the Indian Economy.

Then consumption-savings and labour supply (hours worked) decisions are given by

Equation (49) is the Euler consumption function for Ricardian households. Equation (50)
equates the marginal rate of substitution between consumption and leisure with the real
wage, the relative price of leisure, and (51) defines hours worked for members of the house-
hold working in each sector.

Non-Ricardian households consume out of current wage income and are described by
counterparts to (49) - (50) given by

W W WIt

C 2 ,t  = h 21,t~B~

Pt

^λ L 2 I,t  =  Wjf

^λ C 2 ,t        Pt

L2I,t  ^≡ 1 ^- h2I,t

Then total per capita consumption is given by

Ct = (1 - λ)C1_,t + λC2_,t

and this completes the household sector of the model.

There are informal and formal wholesale and retail sectors. Let Ni,t be the total labour
supply to sector i = I, F . Then the wholesale sectors each produce a homogeneous good
using the technology

Yi^W,t = F(Ai,t,ni,t,hi,t,Ki,t) = (Ai,tHi,t)^αiKi¹,^-t^αi

NF,t ≡ (1 - λ)nF,th1F,t

NI,t ≡ (1 - λ)(1 - nF,t)h1I,t + λh2I,t

Homogeneous wholesale output is converted into a differentiated good m according to

Yi,t(m)  = (1 - ci)Yi,t(m)^W

Wholesale firms employ labour up to the point where the marginal product of labour equals
the cost of labour which now includes an employment tax τi,t, i = I, F .

PiWt „        PiWt OiYW   Wit      ,

P FNi^t =    -NÜ = ɪ^{(1+ τ}i^t )

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