Debt-deficit dynamics in India and macroeconomic effects: A structural approach
AbstractThe structural approach adopted in this paper aims to trace out the evolution of public debt and deficits over a medium term horizon and its dynamic interaction with other key macroeconomic variables such as interest rate, inflation, trade gap and output. The policy simulations for India reveal that persistence of high level of fiscal deficits and debt may have adverse impact on interest rate, output, inflation and trade balance in the medium to long run. The passive evolution of fiscal deficits leads to an unstable regime over the medium to long term as debt-GDP ratio rises asymptotically. The findings of the paper imply that fiscal adjustment with compositional shifts in expenditure to achieve convergence not only leads to acceleration in the investment rate in the economy, it also facilitates monetary management by moderating inflation expectations and contributing to stable interest rate regime. The adjusted converging debt path is consistent with the higher growth trajectory. Such corrections also do not pose the challenge of growth inflation trade-off.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16480.
Date of creation: 2007
Date of revision: 2007
Public debt; Fiscal deficit; Prices; Interest rates.;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- H6 - Public Economics - - National Budget, Deficit, and Debt
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