DSGE Modelling and the Indian Economy: A Path to Enhanced Macroeconomic Forecasting and Policy Making

Dynamic Stochastic General Equilibrium (DSGE) modelling has emerged as a fundamental tool for macroeconomic analysis, offering insights into the dynamic interactions of economic agents under stochastic influences. This paper explores the application of DSGE models in the context of the Indian economy, addressing key challenges, policy implications, and the suitability of various modelling approaches. The study evaluates existing literature, formulates pertinent research questions, and applies empirical techniques to test hypotheses relevant to India’s macroeconomic framework. Additionally, the research delves into the role of DSGE models in fiscal and monetary policy formulation, their predictive accuracy compared to traditional econometric models, and their capacity to account for informal sector dynamics. The findings contribute to a deeper understanding of how DSGE models can aid in effective policymaking in India and highlight areas for future enhancements.