Determination of Interest Rate in India: Empirical Evidence on Fiscal Deficit-Interest Links and Financial Crowding Out
AbstractControlling for the capital flows, using the high frequency macrodata of financially deregulated regime, the paper examined whether there is any evidence of fiscal deficit determining interest rate in the context of India. The period of analysis is FY 2006-07 to FY 2011. Quite contrary to the debates in the policy circles, the results found that increase in fiscal deficit does not cause the rise in interest rates. Using the asymmetric vector autoregressive model, it is established that the rate of interest is affected by the reserve money changes, expected inflation and volatility in the capital flows, but not the fiscal deficit. This result has significant policy implications for interest rate determination in India. The long term and short term interest rates are analysed to determine the occurrence of financial crowding out, but fiscal deficit does not appear to be causing both shorts and longs.
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Bibliographic InfoPaper provided by National Institute of Public Finance and Policy in its series Working Papers with number 12/110.
Date of creation: Dec 2012
Date of revision:
Note: Working Paper 110, 2012
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Fiscal deficit ; Asymmetric vector autoregressive model ; Financial crowding out;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- H6 - Public Economics - - National Budget, Deficit, and Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-CBA-2012-12-22 (Central Banking)
- NEP-MAC-2012-12-22 (Macroeconomics)
- NEP-MON-2012-12-22 (Monetary Economics)
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