How India’s fiscal policy continues to dominate monetary policy?

Another nice paper from RBI econs. This has always been the case but with FRBM you thought the dominance would reduce. Biut nothing like that ha happened:

This 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.

Read the paper for more details..

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5 Responses to “How India’s fiscal policy continues to dominate monetary policy?”

  1. hishamh Says:

    I’m not familiar with India’s economy, but…“automatic monetisation of fiscal deficit”? Does that mean what I think it means?

    • Amol Agrawal Says:

      Autmomatic monetisation of fiscal deficit when central banks buy the bonds of the government . THis was a common practice in India till 1997 has been stopped since then

  2. Stock Tips Intraday Says:

    Under the prevailing scenario, both the monetary and fiscal policy should move in tandem otherwise monetary policy alone would be ineffective and more likely to have the short term impacts in terms of economic growth in real sense.

  3. Kamesh Says:

    Hi, I need some info about Monetary and Fiscal policies. I am novie to this subject. I need the info regarding civil service preperation. Could anybody please help?

    • Amol Agrawal Says:

      Hi kamlesh,

      What is it that you want to know? On a highly general note, Fiscal Policy is in the domain of finance ministries and deals with taxes and government expenditure. Monetary Policy is with central banks who are responsible for money supply and interest rates which finally impacts inflation. The two are connected as higher government expenditures lead to higher inflation. Higher interest rates by central banks leads to lower investment and lower tax revenues for the government leading to wider deficits. So it is all connected.

      Let me know anything more specific you are looking at

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