Macroeconomic transmission of Eurozone shocks to India—A mean-adjusted Bayesian VAR approach.

This paper analyzes the macroeconomic transmission of Eurozone shocks to an emerging economy — India using the mean-adjusted Bayesian Vector Autoregressive (BVAR) model. In its quantitative exploration, the study answers two key issues: (i) is there any evidence of decoupling from advanced economy business cycles? And (ii) what was the impact of the Eurozone recession on the growth performance of India? The findings suggest that Eurozone idiosyncratic shocks, on average, had large effects on economic activity in India. The variation explained by the innovations generated by the BVAR model range from 1.8 percent to 3.6 percent in the 1–12 quarter horizon. The main results are supported by the empirical estimations of the Wavelet analysis. The estimated output elasticities suggest that the Eurozone recession had a significant negative impact on India. The implication is that well-balanced diversity in the productive structure of emerging economies, particularly India, can diffuse the transmission of macroeconomic shocks from the advanced economies. [ABSTRACT FROM AUTHOR]