Identifying Long Run Supply Curve in India
19 Pages Posted: 26 Oct 2004
Date Written: October 9, 2004
Abstract
Identifications of a vertical and then a horizontal supply curve are successively imposed on Indian time series inflation and industrial output growth data in a two equation Structural Vector Autoregression (SVAR). The results provide an indirect test of the identifications. A high elasticity of long-run supply cannot be ruled out, because supply shocks have a large impact on inflation and demand has a large and persistent effect on output levels. But supply is subject to large shocks. Estimated structural shocks capture historical recessions and turning points well. Pro-cyclical policy induced demand shocks aggravated negative supply shocks or failed to take full advantage of positive supply side developments.
Keywords: Horizontal and Vertical Long-Run Supply Curve, Demand and Supply Shocks, Structural VAR, Identification, Historical Decomposition
JEL Classification: C32, E31, E32
Suggested Citation: Suggested Citation
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