Sources of Business Cycle Volatility in the Indian Economy

Abstract

This study investigated the sources of economic fluctuation in the Indian economy. To assess this objective, time-based and frequency-based filters are applied to extract the business cycle from the Gross Domestic Product. Further, a causal link between the business cycle and its different sources was explored using Markov’s regime-switching regression. The results indicated that total factor productivity, oil supply, and monetary policy increased business cycle volatility. Furthermore, although the fiscal policy remained unaffected, trade increased economic fluctuations during the pro-market regime. The findings suggested that the views of the real business cycle and monetarist schools of thought hold true for economic fluctuation in India, as opposed to the Keynesian view.