An Estimated DSGE Model of the Indian Economy.

Parameter

Notation

Prior distribution

NK Model

Posterior distribution^

Density

Mean

S.D/df

NK Model with FA

2-sector NK Model

Risk aversion

σ

Normal

2.00

0.50

2.14 [1.40:2.92]

1.62 [0.74:2.43]

1.99 [1.33:2.69]

Calvo prices (F)z

ξF

Beta

0.75

0.15

0.57 [0.45:0.69]

0.39 [0.26:0.51]

0.75 [0.57:0.95]

Calvo prices (I)

ξI

Beta

0.75

0.15

-

-

0.30 [0.15:0.43]

Labour share (F)

αF

Beta

0.60

0.10

-

-

0.68 [0.60:0.76]

Labour share (I)

α∕αι

Beta

0.80

0.10

0.62 [0.47:0.76]

0.78 [0.69:0.88]

0.74 [0.61:0.87]

Preference parameter

^%

Beta

0.50

0.20

0.40 [0.22:0.58]

0.25 [0.12:0.37]

0.22 [0.10:0.31]

Substitution elasticity (varieties, F)

ζF

Normal

7.00

0.50

7.01 [6.17:7.79]

6.96 [6.12:7.75]

7.02 [6.21:7.81]

Substitution elasticity (varieties, I)

ζI

Normal

7.00

0.50

-

-

7.00 [6.17:7.82]

Substitution Elasticity (F/I goods)

μ

Normal

1.50

0.20

-

-

1.45 [1.13:1.76]

Degree of Labour market frictions

rW

Beta

0.75

0.10

-

-

0.78 [0.64:0.92]

GDP Contribution

relY ≡ PyF

Normal

1.00

0.50

-

-

1.15 [0.67:1.64]

Financial accelerator/RT consumers

External finance premium elasticity (F)

χF

Inv. gamma

0.05

4.00

-

0.03 [0.01:0.05]

0.05 [0.01:0.10]

External finance premium elasticity (I)

χI

Inv. gamma

0.05

4.00

-

-

0.03 [0.01:0.05]

Inverse of Leverage (F)

nkF

Beta

0.50

0.15

-

0.58 [0.41:0.74]

0.53 [0.29:0.75]

Inverse of Leverage (I)

nkI

Beta

0.50

0.15

-

-

0.61 [0.39:0.81]

Entrepreneurs survival rate (F)

ξeF

Beta

0.93

0.05

-

0.93 [0.88:0.96]

0.90 [0.88:0.98]

Entrepreneurs survival rate (I)

ξeI

Beta

0.93

0.05

-

-

0.89 [0.84:0.95]

Proportion of RT consumers

λ

Beta

0.40

0.10

-

0.21 [0.11:0.29]

0.30 [0.19:0.43]

Interest rate rule

Interest rate smoothing

^ρ

Beta

0.75

0.10

0.81 [0.70:0.92]

0.79 [0.66:0.92]

0.80 [0.68:0.93]

Feedback from expected inflation

θ

Normal

2.00

1.00

1.64 [0.31:3.14]

2.42 [0.83:3.89]

2.40 [1.09:3.53]

Feedback from past inflation

φ

Normal

2.00

1.00

0.52 [-0.09:1.14]

1.64 [0.48:2.86]

1.00 [0.15:1.76]

Degree of forward-lookingness

ψ

Beta

0.50

0.20

0.51 [0.17:0.83]

0.42 [0.13:0.72]

0.50 [0.21:0.78]

Degree of backward-lookingness

τ

Beta

0.50

0.20

0.47 [0.10:0.86]

0.46 [0.11:0.84]

0.50 [0.15:0.88]

AR(1) coefficient

Technology (F)

ρAF

Beta

0.75

0.10

0.60 [0.46:0.74]

0.73 [0.61:0.85]

0.72 [0.58:0.88]

Technology (I)

ρAI

Beta

0.75

0.10

-

-

0.70 [0.56:0.84]

Government spending

ρG

Beta

0.75

0.10

0.66 [0.56:0.77]

0.82 [0.71:0.92]

0.79 [0.81:0.87]

Price mark-up (F)

ρMSF

Beta

0.75

0.10

0.69 [0.52:0.87]

0.68 [0.53:0.83]

0.73 [0.57:0.89]

Price mark-up (I)

ρMSI

Beta

0.75

0.10

-

-

0.74 [0.59:0.91]

Risk premium

ρRPS

Beta

0.75

0.10

0.67 [0.58:0.75]

0.78 [0.70:0.86]

0.78 [0.69:0.87]

Standard deviation of AR(1) innovations/I.I.D. shocks

Technology (F)

sd ( A )

Inv. gamma

3.00

3.00

1.78 [1.08:2.46]

1.21 [0.90:1.51]

2.09 [1.07:3.21]

Technology (I)

sd ( €Ai )

Inv. gamma

3.00

3.00

-

-

1.61 [1.13:2.12]

Government spending

sd ( -G )

Inv. gamma

3.00

3.00

7.01 [4.87:9.17]

5.78 [1.12:9.77]

21.09 [17.19:25.00]

Price mark-up (F)

sd ( ^msF )

Inv. gamma

3.00

3.00

2.66 [0.97:4.53]

4.87 [1.21:8.31]

2.11 [1.01:3.25]

Price mark-up (I)

sd ( ^MSi )

Inv. gamma

3.00

3.00

-

-

2.07 [0.99:3.16]

Risk premium

sd ( tRPS)

Inv. gamma

3.50

3.00

3.93 [1.95:5.89]

1.94 [1.28:2.56]

1.99 [1.30:2.66]

Monetary policy

sd ( <mps )

Inv. gamma

3.00

3.00

1.38 [0.95:1.80]

2.77 [1.52:4.03]

1.96 [1.12:2.76]

Employment ratio^?

_rpι ^Ξj(^^λΠFΣΣ
'^eln ≡ (1 -λ)(1 -nF)+λ

n.a.

0.20

n.a.

-

-

0.28 [0.22:0.35]

Price contract length (F)

1

1 -ξF

2.38

1.67

4.02

Price contract length (I)

1

1 -ξl

-

-

1.43

relγ ⁽PP´¹ -^μCt-(

PF ´( It+G t )

Weight on formality

w ≡ ∕p_f √-μ-----^l

p P-, ∖ ι-μ -

-

-

0.30

P^f^)   C^t + relγ

(PI)    Ct

LL

-358.95

-356.28

-350.73

Prob.

0.0003

0.0039

0.9959