Essays on India's monetary and fiscal policies and their interrelation
Creators: name: Nguyen, Duc Truong
Publisher: name: The Australian National University
Year: 2014
Subjects: subject: Monetary policy India
subject: Monetary policy Mathematical ModelsIndia
subject: Fiscal policy India
subject: Economic policy India

description: This dissertation consists of four essays on India's monetary and fiscal policies and their interrelation. The Introduction reviews the existence of the relationship between these two policies. This chapter employs a simple panel data model to analyse the relationship between fiscal deficit and central bank independence (CBI). The intuition behind this model is that if there is a connection between fiscal deficit and CBI, monetary and fiscal policies must be correlated, whence the subsequent analysis of the interrelation between these policies is feasible. This connection was confirmed by statistically significant coefficients of the estimated model. With the result from the first essay, I examine monetary reaction function (MRF) for India in the second essay. I construct MRFs using different versions of Phillips and IS Curves. I derive two IS Curves from a basic neoclassical model and a model by Davig and Leeper (2011), combine these two IS Curves with three available types of Phillips Curves to make six MRFs. I then estimate these MRFs using the Markov switching method with the purpose of finding out what the Indian MRFs look like and whether it switches between active and passive states. If India's MRFs switches between these states, India's fiscal reaction function must be estimated using the same Markov switching method accordingly. It turned out that India's monetary policy is always in active state. OLS estimations are carried out to confirm the results from Markov switching method. The estimated MRFs track the actual data very well. The third essay estimates India's fiscal reaction function (FRF). With the result from the second essay that India's monetary is always in active state, it can be inferred that India's fiscal policy should be passive because this makes the economy more stable. Therefore, I proceed with estimating India's FRF based on the government intertemporal budget constraint, which is always balance and passive in its nature. To study India FRF, this essay first establishes the theoretical foundations for the empirical estimation. In estimating India's FRF, data stationary problems are found and unbalanced regressions are employed. This essay finds that India's fiscal policy depends on debt, output gap, and interest rate levels. The estimated FRF tracks the actual reaction function very closely. The fourth essay uses a VAR model to analyze the interrelation between India's monetary and fiscal policies. This essay modifies a financial model by Sharma and Jha (2012) then applies VAR to study the interrelation between fiscal and monetary policies and how these policies affect economic growth in the context of India. It is found that the Indian economy is resilient to exogenous shock. Besides two reasons suggested in Sharma and Jha (2012) including the low integration level of the Indian banking system to the world financial market and the domination of domestic consumption and investment, this essay adds that right policies have been carried out in the face of the global financial crisis and monetary policy is always effective in dealing with exogenous shock. The dissertation concludes with a short chapter on conclusions.