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Is the Government Deficit in India Still Relevant for Stabilisation?

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  • Khundrakpam, Jeevan K.
  • Goyal, Rajan

Abstract

This paper employing bounds test to cointegration analysis (Pesaran et al, 2001) revisited the linkages between real output, price and money and studied the impact of government deficit on money in India for the period 1951-52 to 2006-07. It finds that money and real output cause price both in the short as well as in the long run while money is neutral to output. Further, evidence shows that government deficit leads to incremental reserve money creation even though the Reserve Bank financing of Government deficit almost ceased to exist during most part of the current decade. It argues that Government deficit by influencing the level of sterilisation impacts the accretion of net foreign assets to RBI balance sheet and, therefore, continues to be a key factor causing incremental reserve money creation and overall expansion in money supply. Given the finding that money leads to inflation, government deficit, therefore, remains relevant for stabilisation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50905.

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Date of creation: Aug 2009
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Publication status: Published in Reserve Bank of India Occasional Papers No. 3, Winter.29(2009): pp. 1-21
Handle: RePEc:pra:mprapa:50905

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Keywords: Deficit; Money; Real Output; Price; ARDL;

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References

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  1. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  2. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
  3. Bijan B. Aghevli & Mohsin S. Khan, 1978. "Government Deficits and the Inflationary Process in Developing Countries (Déficits publics et processus inflationniste dans les pays en développement) (Los déficit públicos y el proceso in," IMF Staff Papers, Palgrave Macmillan, vol. 25(3), pages 383-416, September.
  4. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  5. Moosa, Imad A., 1997. "Testing the long-run neutrality of money in a developing economy: the case of India," Journal of Development Economics, Elsevier, Elsevier, vol. 53(1), pages 139-155, June.
  6. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(3), pages 251-70, July.
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Cited by:
  1. Khundrakpam, Jeevan Kumar & Pattanaik, Sitikantha, 2010. "Global Crisis, Fiscal Response and Medium-term Risks to Inflation in India," MPRA Paper 50907, University Library of Munich, Germany.
  2. Inder Sekhar Yadav & M.A. Lagesh, 2011. " Macroeconomic Relationship in India: ARDL Evidence on Cointegration and Causality," Journal of Quantitative Economics, The Indian Econometric Society, The Indian Econometric Society, vol. 9(1), pages 156-168.

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