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RBI's Monetary Policy, Fiscal Deficits and Financial Crowding Out in India: An Empirical Investigation

Author

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  • Chakraborty, Lekha

    (National Institute of Public Finance and Policy)

Abstract

Using high-frequency macrodata from a financially deregulated regime, the paper examines whether there is any evidence of financial crowding out in India. The macroeconomic channel through which financial crowding out occurs is the link between the fiscal deficit and interest rate determination. Using ARDL models, it is established that the interest rate is affected by inflationary expectations, not by the fiscal deficit. The term structure of interest rates in India is also incorporated into loanable fund models to analyze the transmission mechanism of the links between long-term and short-term interest rates, which is found to be affirmative, and the financial markets in India are not highly segmented. This result has significant policy implications for interest rate determination in India, especially when fiscal policy has remained accommodative for economic growth recovery through high public capital expenditure investment.

Suggested Citation

  • Chakraborty, Lekha, 2024. "RBI's Monetary Policy, Fiscal Deficits and Financial Crowding Out in India: An Empirical Investigation," Working Papers 24/414, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:24/414
    Note: Working Paper 414, 2024
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    File URL: https://www.nipfp.org.in/media/medialibrary/2024/07/WP_414_2024.pdf
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    More about this item

    Keywords

    fiscal deficit ; interest rate determination ; asymmetric vector autoregressive model ; financial crowding out;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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