An Estimated DSGE Model of the Indian Economy.

Contents

1 Introduction 1

2 A Standard NK Model 3

2.1 The RBC Core .................................. 3

2.2 From RBC to NK ................................ 6

2.3 The Central Bank ................................ 8

2.4 Shock processes .................................. 9

2.5 Bayesian Estimation for US and India ..................... 9

2.5.1 Bayesian Methods ............................ 10

2.5.2 Data, Priors and Calibration ...................... 10

2.5.3 Posterior Estimates ........................... 12

3 A NK Model with Financial Frictions 14

3.1 Bayesian Estimation for India .......................... 16

4 A Two-Sector NK Model with an Informal Sector 17

4.1 Dynamic Model .................................. 17

4.2 Bayesian Estimation for India .......................... 20

5 Empirical Applications 22

5.1 Further Model Validation ............................ 22

5.2 Standard Moment Criteria ............................ 23

5.3 Unconditional Autocorrelations ......................... 24

5.4 Variance Decomposition of Business Cycle Fluctuations ........... 25

5.5 Posterior Impulse Response Analysis ...................... 26

6 Discussion and Future Developments: Open Economy and Policy 29

A Summary of One-Sector Model 34

A.1 Dynamic Model .................................. 34

A.2 Steady State ................................... 35

B Summary of two-Sector Model 36

B.1 Dynamic Model .................................. 36

B.2 Steady State ................................... 38

C Tables and Figures 42