Has India emerged? Business cycle stylized facts from a transitioning economy

Abstract

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Fiscal Policy in an Emerging Market Business Cycle Model

“…We also believe that the speci…cation of …scal policy in this paper is particularly relevant for India (and other EMEs). For instance, although there have been major …nancial sector reforms, public 11 The counter-cyclicality of government spending is also consistent with the theoretical prediction of government spending in the neo-classical framework where we would expect to see government consumption move counter-cyclically, if public and private components are substitutes. See Lane (2003).…”

“…In general, the net e¤ect will be positive (i.e., equilibrium employment and output increase). 11 We also show that …scal policy's second role in our model -to subsidize working capitaldampens the reduction in labor demand due to a positive interest rate shock in the standard Neumeyer and Perri (2005) setup. Thus, both labor supply and labor demand channels make the real interest rate a-cyclical, and under certain cases, pro-cyclical, matching the qualitative features of the EME data in Table 2.…”

“…13 We choose India because India typi…es the broader EME business cycle experience listed in Column 3 ( Table 2). The key Indian stylized facts are: higher relative consumption volatility, higher relative investment volatility, counter-cyclical net exports, counter-cyclical government expenditures, and a pro-cyclical interest rate (see Ghate et al (2013), Table 5). 14 The counter-cyclicality of government expenditures has been coupled with pro-cyclical interest rates and counter-cyclical next exports, consistent with the evidence on other EMEs reported in Table 1 and Table 2.…”

“…Based on the quarterly data available on the Indian macroeconomy documented in Ghate et al (2013), the stylized facts relevant for the Indian economy are 25 , (a) higher relative consumption volatility, (b) counter-cyclical net exports, (c) counter-cyclical government expenditures, and (d) a pro-cyclical real interest rate. These facts are based on quarterly data available on the Indian macroeconomy documented in Ghate et al (2013), for which we seek to replicate qualitatively. As we noted in the introduction, while the …rst two facts are common to a wide variety of EMEs, there is no robust stylized observation on the correlation between real government expenditure and output.…”

“…A recent empirical literature has identi…ed key stylized facts in emerging market economy business cycles to see how these di¤er from the main features of advanced economy (AE) business cycles (see Agénor et al (2000), Rand and Tarp (2002), Neumeyer and Perri (2005), Loayza et al (2007), Male (2010), and Ghate et al (2013)). The key stylized facts that these papers have identi…ed are as follows.…”