Abstract

http://ssrn.com/abstract=2283036
 


 



Monetary versus Fiscal Policy in India? An SVAR Analysis of their Efficacy and Co-ordination


Sanchit Arora


Indira Gandhi Institute of Development Research (IGIDR)

June 21, 2013


Abstract:     
Conventionally, policy makers relied on three policy options to manage business cycles - debt financed government spending, debt financed tax rebate and interest rate. While the first two are fiscal policy instruments, the latter is a monetary policy instrument. This paper aims to capture interactions among the policies and the effect on macro-variables in response to the policy shocks to understand Indian monetary and fiscal policy coordination for the period 1990Q1-2011Q4. Policy shocks are identified using the novel method of sign restrictions combined with magnitude restrictions in an SVAR framework, and interpreted using impulse responses and variance decomposition. Results show that monetary policy responds to tax rebate and expenditure shocks differently. In the case of a tax rebate shock, monetary policy responds by reducing interest rates thereby accommodating fiscal expansion. On the opposite, monetary policy seems not to accommodate expenditure shocks. Interestingly, monetary policy shock is accompanied by a fiscal expansion which threatens the credibility of central bank actions, thus indicating towards fiscal policy dominance. A comparison of the efficacy of policies suggests that interest rate is more effective in stimulating output. Out of the two fiscal policy instruments analyzed, tax cut seems to be the better option for stimulating output considering output-debt trade-off.

Keywords: Monetary policy, Fiscal policy, SVAR, Sign restrictions, India

JEL Classification: E52, E62

working papers series


Not Available For Download

Date posted: June 22, 2013  

Suggested Citation

Arora, Sanchit, Monetary versus Fiscal Policy in India? An SVAR Analysis of their Efficacy and Co-ordination (June 21, 2013). Available at SSRN: http://ssrn.com/abstract=2283036

Contact Information

Sanchit Arora (Contact Author)
Indira Gandhi Institute of Development Research (IGIDR) ( email )
Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India
Feedback to SSRN


Paper statistics
Abstract Views: 276

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.359 seconds