Macroeconometric Methods: Applications to the Indian Economy

Foreword
Acknowledgments
Contents
Editor and Contributors
1 Introduction
1 Macroeconometrics
2 Significance of the Indian Economy in the Current Economic Order
2.1 Economic Growth
2.2 Demographic Dividends
2.3 International Trade
2.4 Foreign Direct Investment
2.5 Remittances
3 Themes in the Volume
4 Conclusions
References
Part I Macroeconomic Modelling and Policy
2 Macroeconomic Modelling and Bayesian Methods
1 Introduction
2 Evolution of Macroeconomic Models
3 Bayesian Methods
3.1 Why Bayesian?
3.2 Forecasting Using Bayesian Models
4 Applications of Bayesian VAR Methods
4.1 Forecasting the INR/USD Exchange Rate: A BVAR Framework (Dua et al. 2023)
4.2 Forecasting Indian Macroeconomic Variables using Medium-Scale VAR Models: Aye et al. (2015)
4.3 Forecasting Interest Rates in India: Dua et al. (2008)
5 Concluding Remarks
Appendix: A Note on Priors
References
3 Monetary Policy Framework in India
1 Introduction
2 Schematic Representation of a Monetary Policy Framework
3 Genesis of Monetary Policy in India Since 1985
3.1 Monetary Targeting with Feedback: 1985–1998
3.2 Multiple Indicator Approach: 1998–2016
3.3 Flexible Inflation Targeting: 2016 Onwards
4 Monetary Policy Transmission Framework
5 Unconventional Monetary Policy Measures
6 Conclusion
Annexure 1
Annexure 2
Annexure 3: Constitution of the Monetary Policy Committee
References
4 Determinants of Yields on Government Securities in India
1 Introduction
2 Interest Rates and Monetary Policy in India: Some Stylised Facts
3 Determinants of Interest Rates
4 Data and Empirical Model
5 Econometric Methodology
5.1 Tests for Non-stationarity
5.2 Cointegration
5.3 Granger Causality
5.4 Variance Decomposition Analysis
6 Empirical Results
6.1 Non-stationarity, Cointegration and Granger Causality
6.2 Generalised Variance Decompositions
7 Conclusion
References
5 Monetary Transmission in the Indian Economy
1 Introduction
2 Monetary Policy Framework of India
3 Channels of Monetary Policy Transmission
4 Literature Review
5 Empirical Model
6 Econometric Methodology
7 Data and Identification Strategy
7.1 Data
7.2 Identification of VAR Model
8 Results
9 Conclusion
Appendix
References
6 India’s Bilateral Export Growth and Exchange Rate Volatility: A Panel GMM Approach
1 Introduction
2 Trends in India’s Exports
2.1 India’s Bilateral Exports: Developed Versus Developing Countries
3 Determinants of Exports
3.1 Demand-side Factors
3.2 Supply-side Factors
4 Empirical Model, Data and Econometric Methodology
4.1 Empirical Model
4.2 Data
4.3 Econometric Methodology
5 Results
5.1 Unit Root Tests and Cross-Sectional Dependence Test
5.2 Panel Estimation Results
5.3 Inferences and Discussion
6 Conclusion
Appendix
References
7 Aggregate and Sectoral Productivity Growth in the Indian Economy: Analysis and Determinants
1 Introduction
2 Productivity Growth in the Indian Economy: Measures, Definitions and Trends
2.1 Concepts of Productivity Growth
2.2 Different Concepts of Productivity Growth for the Indian Economy
2.3 Trends in Labour and Total Factor Productivity Growth
3 Determinants of Labour Productivity Growth
3.1 Aggregate Economy Model
3.2 Sectoral Model
4 Econometric Methodology
5 Data
6 Econometric Results
6.1 Aggregate Economy
6.2 Disaggregate Economy
7 Conclusion
References
Part II Forecasting the Indian Economy
8 Forecasting the INR/USD Exchange Rate: A BVAR Framework
1 Introduction
2 Exchange Rate Models
2.1 Purchasing Power Parity, Monetary and Portfolio Balance Models
2.2 Capital Flows, Volatility of Capital Flows, Forward Premium
2.3 Microstructure Framework
2.4 Intervention
3 Empirical Models—Dua and Ranjan (2010, 2012) Model and Its Extension
3.1 Exchange Rate and Stock Prices
3.2 Exchange Rate and Oil Prices
4 Econometric Methodology
4.1 Testing for Nonstationarity
4.2 VAR, BVAR and VECM Modelling
4.3 Evaluation of Forecasting Models
5 Empirical Results
5.1 Testing for Nonstationarity
5.2 Testing for Cointegration
5.3 Empirical Results: Out-Of-Sample Forecasts-February 2017–January 2018
5.4 Empirical Results: Out-Of-Sample Forecasts-February 2018–January 2019
5.5 Empirical Results: Out-Of-Sample Forecasts-February 2017–January 2019
6 Conclusion
Appendix
References
9 Forecasting India’s Inflation in a Data-Rich Environment: A FAVAR Study
1 Introduction
2 New Keynesian Phillips Curve
3 Empirical Model
4 Econometric Methodology
4.1 Unit Root Testing
4.2 FAVAR Model
4.3 Evaluation of Forecasting Models
5 Empirical Results
5.1 Unit Root Testing
5.2 Forecast Error Variance Decompositions (FEVD)
5.3 Evaluation of Forecasts
6 Conclusion
Appendix
References
10 A Structural Macroeconometric Model for India
1 Introduction
2 Macroeconomic Modelling in India
3 The Base Model
3.1 Aggregate Demand
3.2 Aggregate Supply
3.3 Money Market
3.4 Government
4 The Empirical Model
4.1 Real Sector
4.2 Fiscal Sector
4.3 Monetary Sector
4.4 Price Block
4.5 External Sector
4.6 Trade Block
5 Estimation Methodology
5.1 Testing For Non-Stationarity
5.2 Testing for Serial Correlation
5.3 Model Validation Using Model Simulation Technique
6 Estimation Results
6.1 Estimation of Behavioural Equations
6.2 Model Simulation
6.3 Model Validation
7 Simulation Experiments
7.1 Alternative Scenarios
7.2 Fiscal Policy Shock
7.3 Mixed Policy Shock
7.4 Weather Shock
7.5 External Price Shock
7.6 Global Shock (GS)
7.7 Propagation Mechanism
8 Conclusion
References
Part III Business Cycles and Global Crises
11 International Synchronization of Growth Rate Cycles: An Analysis in Frequency Domain
1 Introduction
2 International Synchronization of Cycles: Literature Review
3 Methodology
3.1 Relationship Between Time and Frequency Domains
3.2 The Frequency Domain: Spectral Analysis
4 Data
5 Results
5.1 Basic Statistics
5.2 Non-Spectral Results
5.3 Synchronization: Cross-Spectral Estimates
6 Conclusion
References
12 Inter-Linkages Between Asian and U.S. Stock Market Returns: A Multivariate GARCH Analysis
1 Introduction
2 Inter-Linkages Between Asian and U.S. Stock Markets and Impact of Crises
3 Methodology
3.1 Markov-Switching Models
3.2 Univariate ARCH/GARCH Models
3.3 Multivariate GARCH Models (MGARCH)
4 Empirical Estimation Strategy and Data
4.1 Estimation Strategy
4.2 Testing for Changes in Conditional Correlation During the Crises
4.3 Data
5 Results
5.1 Multivariate GARCH Estimates
5.2 Test for Contagion
6 Conclusion
References
13 The Increasing Synchronization of International Recessions
1 Introduction
2 Synchronization of Recessions: Measures
2.1 Clustering of Start and End Dates of Recessions
2.2 Proportion of Economies in Expansion
2.3 Diffusion Index of the Coincident Indexes of Various Countries
3 The COVID Crisis and Its Recessionary Antecedents
4 Common Shocks, Supply Chain Dynamics, and Global Recessions
5 Conclusion
References