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Revisiting the role of fiscal policy in determining interest rate in India

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  • Ranjan Kumar Mohanty
  • N. R. Bhanumurthy

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.

Suggested Citation

  • Ranjan Kumar Mohanty & N. R. Bhanumurthy, 2021. "Revisiting the role of fiscal policy in determining interest rate in India," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 26(2), pages 293-318, April.
    • Handle: RePEc:taf:rjapxx:v:26:y:2021:i:2:p:293-318
    DOI: 10.1080/13547860.2021.1913811
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    Cited by:

    1. Ranjan Kumar Mohanty, 2020. "Fiscal Deficit and Economic Growth Nexus in India: A Simultaneous Error Correction Approach," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(3), pages 683-707, September.
    2. Chakraborty, Lekha, 2020. "Fiscal Consolidation Ex-post the Escape Clause: A Call for "Excessive Deficit Procedure"," Working Papers 20/299, National Institute of Public Finance and Policy.
    3. Ranjan Kumar Mohanty & Sidheswar Panda, 2020. "How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(3), pages 253-284, August.
    4. Rangarajan, C., 2020. "The New Monetary Policy Framework - What it Means," Working Papers 20/297, National Institute of Public Finance and Policy.

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    More about this item

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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