Abstract:

The recession following the sub-prime crisis has rekindled international interest in the field of monetary and fiscal policy interaction. However, very little has been done to appropriately estimate these dynamic policies. This paper estimates regime- switching monetary and fiscal policy rules and lays strong emphasis on mis-specification testing. We apply a Markov regime-switching model to estimate monetary and fiscal policy rules for India to highlight the evolving stance of Indian macro-policy for the period 1951–2008 and investigate the behaviour of select macroeconomic variables under the estimated policy regimes. Our results suggest that, in India, fiscal policy was largely active for the entire period except for a few periods of restraint. Monetary policy, despite achieving greater autonomy post-1990s, has largely been accommodating fiscal policy. Whenever monetary policy became active, fiscal policy undermined monetary policy’s effectiveness by not accommodating accordingly. We argue for an aggressive monetary policy and a constrained fiscal policy in India.

Bio:

   Dr. Sanchit Arora is currently working with Ernst & Young as an Economist and helping the Indian income tax department in tax research. Prior to joining E&Y, he worked with Nielsen and CRISIL, where-in he closely worked with clients to solve their business problems by building verifiable hypotheses and testing them through primary or secondary research. He earned his Ph.D. from Indira Gandhi Institute of Development Research in 2016 and participated in an advanced studies program in Germany in 2013-14. His research interests include macroeconomics, especially, monetary and fiscal policy interaction dynamics.