Revisiting the role of fiscal policy in determining interest rate in India. Issue 2 (3rd April 2021)

• Record Type: Journal Article
• Authors: Mohanty, Ranjan Kumar; Bhanumurthy, N. R.
• Is Part Of: Journal of the Asia Pacific economy. Volume 26:Issue 2(2021)
• Page Start: 293
• Page End: 318
• Publication Date: 2021-04-03
• Subjects: Fiscal policy -- fiscal deficit -- interest rate -- structural vector autoregression (SVAR); Asia -- Economic conditions -- 1945- -- Periodicals; Pacific Area -- Economic conditions -- Periodicals; Asia -- Economic integration -- Periodicals; Pacific Area -- Economic integration -- Periodicals; 330.95
• DOI: 10.1080/13547860.2021.1913811
• Languages: English
• ISSNs: 1354-7860

Abstract

Abstract: The issue of fiscal policy affecting interest rates is ever-evolving that depends on the structure of the economy and the strength of the financial markets. Hence, it is necessary to continuously validate this relationship between fiscal policy and interest rates. Towards this, the present paper tries to empirically examine and understand the transmission channels through which fiscal policy could affect short, medium, and long-term interest rates in India using Structural Vector Autoregression (SVAR) and Toda-Yamamoto causality approaches. Our results suggest that fiscal policy has a marginal impact on interest rates in the short run, while it has a larger positive impact on interest rates in the long run through the inflation route. In terms of the policy, in the long run, there is a need for containing the structural part of the fiscal deficit within the fiscal consolidation (Fiscal Responsibility and Budget Management Act) framework in India.