Is the Government Deficit in India Still Relevant for Stabilisation?
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.
|Date of creation:||Aug 2009|
|Date of revision:|
|Publication status:||Published in Reserve Bank of India Occasional Papers No. 3, Winter.29(2009): pp. 1-21|
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