Coordination of Monetary and Fiscal Policies for Growth with Price Stability in a Post‐COVID‐19 Indian Economy*

Abstract

During the post‐COVID period, demand augmenting policies were needed and have been exercised by the Government of India to prevent the Indian economy from falling into recession. However, these demand augmenting policies seem to be inflationary as in the recent past high inflation has been observed in India. Thus, optimum combination of monetary and fiscal policies is needed to simultaneously achieve the objectives of demand growth and price stability. This paper proposes combinations of the two policies based on the results of a sign‐restricted vector autoregressive (VAR) modelling framework. The experimentation was performed using sign restrictions on macroeconomic target variables viz. demand growth and inflation rate while leaving the policy variables free to suggest proposed stances to achieve desired objectives. On the basis of the empirical findings, the proposed stances of monetary and fiscal authorities were then compared with the actual stances and requisite correction in the policy behaviours has been suggested in terms of improvements to the magnitude and frequency of contraction and expansion.