Debt-deficit dynamics in India and macroeconomic effects: A structural approach
The 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.
|Date of creation:||2007|
|Date of revision:||2007|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Aschauer, 1988.
"Does public capital crowd out private capital?,"
88-10, Federal Reserve Bank of Chicago.
- Goyal, Rajan & Khundrakpam, J. K. & Ray, Partha, 2004. "Is India's public finance unsustainable? Or, are the claims exaggerated?," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 401-420, April.
- Moorthy, Vivek & Singh, Bhupal & Dhal, Sarat Chandra, 2000. "Bond financing and debt stability: theoretical issues and empirical analysis for India," MPRA Paper 12148, University Library of Munich, Germany.
- Pradhan, B. K. & Ratha, D. K. & Sarma, Atul, 1990. "Complementarity between public and private investment in India," Journal of Development Economics, Elsevier, vol. 33(1), pages 101-116, July.
- Easterly, William & Schmidt-Hebbel, Klaus, 1993. "Fiscal Deficits and Macroeconomic Performance in Developing Countries," World Bank Research Observer, World Bank Group, vol. 8(2), pages 211-37, July.
- Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
- Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-65, September.
- Willem H. Buiter & Urjit R. Patel, 2005. "Excessive Budget Deficits, a Government-Abused Financial System, and Fiscal Rules," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 2(1), pages 1-54.
- V. Sundararajan & Subhash Thakur, 1980. "Public Investment, Crowding out, and Growth: A Dynamic Model Applied to India and Korea (Investissement public, "effet de refoulement" et croissance: un modÃ¨le dynamique appliquÃ© Ã l'Inde ," IMF Staff Papers, Palgrave Macmillan, vol. 27(4), pages 814-855, December.
- Cashin, P. & Olekalns, N., 2000. "An Examination of the Sustainability of Indian Fiscal Policy," Department of Economics - Working Papers Series 748, The University of Melbourne.
- Hamilton, James D & Flavin, Marjorie A, 1986.
"On the Limitations of Government Borrowing: A Framework for EmpiricalTesting,"
American Economic Review,
American Economic Association, vol. 76(4), pages 808-19, September.
- James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
- Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
- Barro, Robert J, 1974.
"Are Government Bonds Net Wealth?,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Cashin, P. & Olekalns, N. & Sahay, R., 1998.
"Tax Smoothing in a Financially Repessed Economy: Evidence from India,"
Department of Economics - Working Papers Series
656, The University of Melbourne.
- Paul Cashin & Nilss Olekalns & Ratna Sahay, 1998. "Tax Smoothing in a Financially Repressed Economy; Evidence From India," IMF Working Papers 98/122, International Monetary Fund.
- Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-17, October.
- Raghbendra Jha & Anurag Sharma, 2001. "Structural Breaks and Unit Roots: A Further Test of the Sustainability of the Indian Fiscal Deficit," ASARC Working Papers 2001-08, The Australian National University, Australia South Asia Research Centre.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:16480. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.