Differential impacts of fiscal consolidation policies under alternative monetary regimes: evidence from Indian economy

Abstract

The study tried to examine the effects of fiscal consolidation policies under alternative monetary stances in Indian economy. Using structurally adjusted vector autoregression (SVAR) we found that both Monetary and Fiscal-policies interact in cooperative as well as competing manner depending on the type and timing of shocks. Although fiscal policy enjoys a certain degree of superiority, the potency of monetary policy has not waned away. In terms of effectiveness, the study found that the fiscal policy is a better tool of economic stabilisation in the short run but in long and medium run it may harm growth. A consolidation program aimed at infusing fiscal prudence was found to have differential impacts on economic growth depending on whether such a policy is undertaken in an expansionary or contractionary monetary regime. Ironically the fiscal-policy was found to have more influence on inflation than monetary policy pointing towards the fiscal theory of price level; FTPL.