Indian Economy During the Era of Quantitative Easing: A Dynamic Stochastic General Equilibrium Perspective



The effect of external Quantitative Easing (QE) on a small open economy like India is analyzed using a dynamic stochastic general equilibrium (DSGE) model. The modeling is motivated by some broad empirical regularities of the Indian economy during the pre and post-QE periods . QE is modeled as a negative shock to the short term foreign policy rate with a mean reverting pattern. The mean reversion reflects the phasing out of the QE operation. In addition, we analyze the “news” effect of the tapering out phase of QE. Our model has standard real and nominal frictions as in any New Keynesian model. Monetary policy is modeled by the forward looking inflation targeting Taylor rule . We show that the impact and news effects of QE work through this terms of trade via the uncovered interest parity condition. Using our DSGE model, we also compare the effect of a QE shock with a domestic fiscal spending shock. The model impulse response functions qualitatively support some key empirical regularities of the Indian economy during the QE era.


Real Exchange Rate Intermediate Good Taylor Rule Dynamic Stochastic General Equilibrium Federal Fund Rate 
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© Springer India 2016

Authors and Affiliations

  1. 1.Centre for Training and Research in Public Finance and PolicyCentre for Studies in Social ScienceKolkataIndia
  2. 2.Durham University Business SchoolDurhamUK

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