Is Fiscal Policy Contracyclical in India: An Empirical Analysis
AbstractThe paper empirically examines the validity of Keynesian philosophy of contracyclical variation in fiscal policy to the macroeconomic activity in India. The macroeconomic activity is proxied by ‘output gap’ a concept defined to estimate the index of economic activity. Applying Johansen’s Full Information Maximum Likelihood test of cointegration, it was found that there exists a long run, stable relationship between fiscal policy stance and macroeconomic activity. Further, the causality detection in asymmetric vector autoregression model revealed that there exists feedback mechanism between fiscal policy stance and output gap, which reinforces the Keynesian theory that fiscal stance is contracyclical in nature. The policy implication of these results points to the fallacy of rule-based fiscal policy to contain fiscal deficit, based on the neo-classical assumption that fiscal deficit has detrimental effects through financial crowding out. The results reinforced the role of fiscal deficit not as an evil but as an instrument of short run demand management and also the significance of pump priming.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 7604.
Date of creation: 2006
Date of revision:
Fiscal stance; Output gap; Contracyclical fiscal policy; Stationarity; Cointegration; Asymmetric vector autoregression;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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