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Tradeoffs, Delegation and Fiscal-Monetary Coordination in a Developing Economy

Author

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research, Mumbai, India)

Abstract

Strategic interaction between fiscal and monetary authorities and economic agents, can lead to the creation of more populism than is socially optimal. The tradeoffs through which this occurs, important for a populous democracy with a large number of poor, is that between populism and growth. This has not received much analytical attention. We derive this tradeoff from microfoundations (i) and show that a Nash equilibrium will occur with a level of populism higher than the optimal; fiscal and monetary interaction will lead to output below feasible levels, (ii) specify the conditions on which the results depend, (iii) discuss stabilisation possibilities, and (iv) show that optimal delegation to a pro-growth monetary authority and a conservative fiscal authority would lower populism and inflation, while keeping growth at sustainable levels. Last, the model is used to interpret Indian macroeconomic performance.

Suggested Citation

  • Ashima Goyal, 2007. "Tradeoffs, Delegation and Fiscal-Monetary Coordination in a Developing Economy," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 42(2), pages 141-164, December.
    • Handle: RePEc:dse:indecr:v:42:y:2007:i:2:p:141-164
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    Citations

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    Cited by:

    1. Keshab Raj Bhattarai, 2016. "Economic Growth and Development in India and SAARC Countries," EcoMod2016 9631, EcoMod.
    2. Ashima Goyal, 2014. "History of Monetary Policy in India Since Independence," SpringerBriefs in Economics, Springer, edition 127, number 978-81-322-1961-3, October.
    3. Goyal, Ashima, 2006. "Macroeconomic policy and the exchange rate: working together?," MPRA Paper 27768, University Library of Munich, Germany.
    4. Goyal, Ashima & Tripathi, Shruti, 2014. "Stability and Transitions in Emerging Market Policy Rules," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 49(2), pages 153-172.
    5. Ashima Goyal, 2010. "Exchange Rate Regimes and Macroeconomic Performance in South Asia," Working Papers id:2545, eSocialSciences.
    6. Ashima Goyal & Shruti Tripathi, 2012. "Stability and policy rules in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-004, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Goyal, Ashima, 2018. "The Indian Fiscal-Monetary Framework: Dominance or Coordination?," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 8(1), pages 1-13.

    More about this item

    Keywords

    Tradeoffs; Dynamic Inconsistency; Fiscal-Monetary Co-Ordination; Delegation;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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