Effects of energy price shock on the macroeconomic indicators of India: a new measure

Abstract

Purpose The purpose of this study is to construct a new index to assess the impact of an energy price shock on macroeconomic indicators of India. This paper also shows a comparative analysis of the constructed index along with pre-existing World Bank and International Monetary Fund indices on energy. Design/methodology/approach This paper uses three vector autoregressions and compute the long-term impact of the indices on the considered macroeconomic variables through impulse response functions. Findings This paper finds that an energy price shock has a detrimental impact on the macroeconomic indicators of India in the long run. This study also finds that the constructed index acts as a relatively more sensitive index in comparison to the International Monetary Fund and World Bank indices, which is bespoke to a developing economy case. This sensitivity is ascribed to dynamic weighting for a different basket of energy components, which are more pertinent to an Indian context. Originality/value The novelty of this research lies in the construction of a new index and its comparison to the existing ones. This study justifies why a developing economy would require a different measure of energy as opposed to the existing indices.