Kalecki’s insights on coordinating India’s fiscal and monetary policy (lessons from Pakistan?)

Good to read and learn from article which bring a key idea/ideas from past to make better policies of today.

Rathin Roy of NIPFP in this piece brings Kaleckian ideas to improve coordination in our fiscal and monetary policies:

The coordination of fiscal and is a difficult challenge for all economies. Coordinating fiscal and involves specifying an analytical framework that is shared by the institutions responsible for these policies, namely, the government and the  Without such a framework there is dissonance about individual policy actions, to the detriment of the national economic discourse.

provided a useful and relevant analysis of the issues involved 50 years ago, carefully characterising the problem separately for advanced and developed economies, and also considering the problem in the Indian context. Kalecki’s contemporary relevance was brought to my attention by Niranjan Rajadhyaksha of the IDFC institute. The recently concluded meeting of central bankers and economists focussed on two concerns central to Kalecki: The role of (impacting aggregate supply) and inequality(impacting aggregate demand) in fiscal and monetary decision making.

In the Indian context, the important Kaleckian question, different from Keynes, is not how is to be financed but at whose expense? 


I use the Kaleckian lens to make two points: first, as recognised at Jackson Hole, orthodox thinking about fiscal-monetary co-ordination is no longer adequate given country-specific circumstance. Second, the basis for discussion about differences in regarding specific fiscal, monetary or decisions must be discussed within a shared (not necessarily Kaleckian) analytical framework. Invoking fear of market wrath or citing temporary benchmarks of economic health only serves as fodder to the commentariatfor damaging speculation about institutional acrimony. In conversations among policy makers with collective responsibility for coordinated action, differences in point of view will occur. Their collective resolution must be based on economic and political rationale, and not on considerations of turf or perceived differences in responsibility. Avoiding fiscal or monetary dominance is a shared institutional responsibility, and history will assign collective blame or credit for success or failure on this score.

Hmmm…Read the whole piece for greater insights.

Here is a piece by Niranjan (who Rathin quotes) which is a short primer on Kalecki’s works. I have to read much more on Kalecki to make any sense….

I blogged about this interesting bit in Pakistan. They set up a Monetary and Fiscal Policies Co-ordination Board and to institutionalise it, made it part of State Bank of Pakistan Act. The Act specifies:

59 B . Monetary and Fiscal Policies Co-ordination Board

1) There shall be a Board for the coordination of fiscal, monetary and exchange rate policies, hereinafter to be called [the Co-ordination Board], consisting of :

(i). Federal Minister for Finance Chairman
(ii). Federal Minister for Commerce or  [Secretary, Ministry of Commerce] Member
(iii). Deputy Chairman, Planning Commission Member
(iv). The Governor Member
(v). Secretary, Finance Division, Government of Pakistan Member
vi) two eminent macro or monetary economists with proven record of research and teaching to be appointed by the Federal Government.

(2) The [Co-ordination Board] shall—
(a) coordinate fiscal, monetary and exchange-rate policies; 
(b) [ensure consistency among macro-economic targets of growth, inflation and fiscal, monetary and external accounts;
(c) [ meet for the purposes of clauses (a) and(b) before the finalization of the budget to determine the extent of Government
d) [ meet on a quarterly basis to review the consistency of macro-economic policies and to revise limits and targets set at the time of the formulation of the budget, keeping in view the latest developments in the economy];
(e) consider limits of the Government borrowing as revised from time to time in the meetings to be held before and after passage of the annual budget;
(f) review the level of Government borrowing in relation to the predetermined or revised targets after every quarter; and
(g) review the expenditure incurred in connection with raising of loans and Government borrowing.

3. State Bank of Pakistan shall place before the Board—
(a) relevant data relating to monetary expansion and Government borrowing; 
(b) the assessment of the State Bank regarding the impact of economic policies of the Government on monetary aggregates 
(c) [{OMITTED}]

4. The Planning Commission and the Ministry of Finance, Government of Pakistan shall, from time to time, bring to the notice of the Board the impact of monetary policy adopted by the State Bank on investment, growth and balance of payment.

(5) The Ministry of Commerce, Government of Pakistan shall, from time to time, bring to the notice of the Board the impact of the monetary policy
by the State Bank on imports and exports.

(6) In carrying out its assigned functions of coordinating fiscal monetary and exchange rate policies and for ensuring consistency among macro economics, targets of growth, inflation and fiscal, monetary and external accounts as laid down in sub-sections (1), (2), (3), (4) and (5), the Coordination Board shall not take any measure that would adversely affect the autonomy of the State Bank of Pakistan as provided in this Act. 

Though, experiences around this body are mixed.

This paper looks at rationale and experiences so far:

In Pakistan there was hardly any concept of coordination between these two
important policies before the financial sector reforms which were initiated in 1989-90.
Before that SBP was not independent and monetary policy was compliant to fiscal policy
practically. This financial reforms and restructuring process compelled the monetary and
fiscal policy coordination and a monetary and fiscal coordination board has been
established in 1994. Its main objectives include the coordination among key policies i.e.
fiscal policy, monetary policy and exchange rate policy and also to safeguard the possible
consistency among macroeconomic targets of growth, inflation, fiscal, monetary and
external accounts see Hanif and Arby (2007).

It also shows that coordination has been weak so far:

The objective of the paper is to test the empirical evidence of fiscal monetary coordination using annual data for Pakistan from 1980–2011. The results of the VAR model showed the evidence of weak coordination between the two institutions as both the fiscal and monetary policy variables affect each other but are insignificant. Further the results of the Granger Causality test provide no evidence of causality running from fiscal to monetary variables or from monetary to fiscal variables. Results of the Impulse Response Function showed that there is weak response of monetary shock to fiscalvariables and also of fiscal shock to monetary variables. Interest rate adjusts to its original level almost after one decade and interest rate shock continues to affect fiscal
surplus for about twenty years.

The variables converge to their long run equilibrium after a very long time. Hence it may be concluded that there is weak or very little coordination
among the policy makers. Arby and Hanif (2010) and Nasir, et al. (2010) also found similar results that the integration between the two policies is weak and they have been executed independently.


So, even if it did not work they did try and coordinate the two policies. Likewise, there are other countries as well who have tried to coordinate these two policies.

But again none of these papers mention Kalecki at all. If you knock off history of economic thought from courses worldwide, this is likely to happen…


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