Time Varying Macroeconomic Dynamics of the Indian Economy

Abstract

This paper investigates the evolving dynamics of the macroeconomy of India in the post reform years after 1991, based on time-varying parameters structural vector autoregression model with stochastic volatility. We find sharp reductions in estimated stochastic volatility during the post reform years for all shocks and variables. In terms of the stochastic volatility, the period 2001 to 2006 seems to have the lowest volatility in the whole sample and can be dubbed as the short ’Great Moderation’ period of India. The estimated stochastic volatility of supply shocks is found to be more than demand shocks. We also note that demand shocks rather seem to be persistent than supply shocks during the period from 2007 to 2014.