Three Essays on Indian Economy

The research work focuses on the applicability of parametric approaches such as Time-Varying and Sign Restricted Vector Auto Regression (VAR), Structural Vector Autoregression (SVAR) models for some problems faced by the Indian Economy. The study is based on three issues, which are categorised as the following three chapters 1. Analysing Inflation in India using Time-Varying SVAR Model 2. Twin Deficit Hypothesis and its Relevance in India: Time-Varying VAR Approach 3. Oil Shocks and Its Impact On Indian Economy: Sign Restricted SVAR Model. In the first chapter using Time-Varying SVAR Impulse Response Functions (IRFs), it is checked whether crude oil price shock has brought about changes in the inflation (p), output growth (x) and interest rate (i) of Indian economy. It is based on the procedure followed by Nakajima (2011). The results indicate that sudden oil price shock is followed by an increase in inflation. The increase in inflation is later accompanied by a declinein output growth, to which Reserve Bank of India (RBI) responds by raising the interest rate, thereby making the inflation move towards the stability level as specified by the RBI i.e. (5-5.5%). In the second chapter, Time-Varying Vector Autoregression (VAR) has been employed to prove the existence of twin deficit hypothesis in India following the methodology by Nakajima (2011). The budget deficit and trade deficit are interrelated through the phenomena termed as twin deficit hypothesis. To understand the phenomena, the study has tried to understand the impact of the fiscal shock on macro variables in India namely current account deficit as a percentage of GDP, Real effective exchange rate of India and real GDP of India. The impact of the fiscal shock on macro variables is studied, as maintaining a sustainable level of budget deficit is considered to be a necessary condition for the maintenance of a comfortable level of current account balance. The results indicate that fiscal deficit and current account deficit are related in the Indian context, and twin deficit hypothesis holds. In the third chapter, a Sign Restricted SVARModel has been employed to understand the macroeconomic impact of oil shocks on the Indian economy. Three types of shocks have been identified using sign restrictions, namely an Oil Supply Shock, Oil Demand Shock created by Global economic activity and an Oil-specific Demand Shock following the identification procedure of Baumister, Peersman and Van Robays (2012). The results indicate that output growth and inflation react very differently to the fluctuations in oil prices as the type of the shock is concerned.