Estimating the Indian natural interest rate and evaluating policy

Ashima Goyal and Sanchit Arora ()
Additional contact information
Sanchit Arora: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We estimate the unobserved time-varying natural interest rate (NIR) and potential output for the Indian economy using the Kalman Filter. Estimation is a special challenge in an emerging market because of limited length of data series and ongoing structural change. A key result in the literature is the NIR is imprecisely estimated. Structural aspects of the economy used in our estimation turn out, however, to improve the precision of the NIR estimates, although potential output continues to be imprecisely estimated. Turning points are well captured and estimates obtained for the output gap elasticity of aggregate supply and the interest elasticity of aggregate demand.The estimated NIR is used as an indicator of the monetary policy stance, which is found to be broadly contractionary and procyclical for the period under study.

Keywords: Natural interest rate; potential output; Kalman filter; monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2013-09
New Economics Papers: this item is included in nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.igidr.ac.in/pdf/publication/WP-2013-017.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2013-017

Access Statistics for this paper

More papers in Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India Contact information at EDIRC.
Bibliographic data for series maintained by Shamprasad M. Pujar ().