An Empirical Analysis of Monetary and Fiscal Policy Interaction in India
Published By: RBI on eSS | Published Date: September, 10 , 2011This study analyses the behaviour of monetary and fiscal policies
interaction in India using quarterly data for 2000Q2 to 2010Q1. It finds that,
even after the elimination of automatic monetisation of fiscal deficit in 1997 and
prohibiting RBI from buying government securities in the primary market under
the FRBM Act from April 2006, fiscal policy continues to substantially influence
the conduct of monetary policy. Specifically, the reaction of the two policies to
shocks in inflation and output is mostly in the opposite direction. While
monetary policy reacts in a counter-cyclical manner, fiscal policy reaction is
primarily pro-cyclical in nature. The positive impact of expansionary fiscal policy
on output is highly short-lived, while there is a significant negative impact in the
medium to long- term. [W P S (DEPR) : 15 / 2011]. URL:[http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=25215]
Author(s): Janak Raj, Khundrakpam J K, Dipika Das | Posted on: Oct 11, 2011 | Views(826) | Download (1575)