Aggregate Fluctuations and Technological Shocks: The Indian Case

Abstract

This study is one among the few attempts to link aggregate fluctuations with productivity and technical efficiency using the data of the Indian industrial sector. In doing so, this study uses firm-level data from the CMIE Prowess and macroeconomic indicators of Indian economy from various government databases. We estimate productivity and technical efficiency using the standard econometric approach. Further, a structural vector error correction (SVEC) model is employed to understand the importance of technological shocks in explaining the aggregate fluctuations. The result without ambiguity indicates that the percentage of variance explained by aggregate demand shocks is larger at lower lag and decreasing. However, the share of technology shock shows an increasing trend over the period of time. Therefore, the aggregate demand shock and the technology shock have conflicting impact as far as aggregate output fluctuations are concerned. The results are similar when we substitute TFP with TE. The findings in general indicate the transitory nature of aggregate demand shocks compared to technology shocks.