Fiscal and monetary policy regimes: New evidence from India

• Published in: Economic modelling 2024-10, Vol.139, p.106838, Article 106838
• Main Authors: Sachdeva, Paras, Ahmad, Wasim
• Format: Article
• Language: English
• Subjects: Debt rollover; Emerging market economy; Fiscal dominance; Fiscal multiplier; Monetary–fiscal policy mix
• ISSN: 0264-9993
• DOI: 10.1016/j.econmod.2024.106838

The paper examines how fiscal and monetary policy coordination in India stabilizes macroeconomic fundamentals. We consider two coordinating fiscal and monetary policy regimes, the “Indian Fiscal” (IF) and M regime and then examine the transmission of public expenditure (PE) shock across these regimes. Monetary policy in the IFregime supports fiscal policy in debt stabilization by reducing interest rates. The M regime fiscal policy supports monetary policy in curbing inflation through fiscal consolidation drives. The IF regime is more conducive to the Indian economy as PE stimulus accelerates economic activity without causing high inflationary and high debt scenarios. In contrast, the M regime has a crowding out effect on PE stimulus while worsening the government's fiscal space. The findings indicate that in the Indian case, the monetary authority should maintain its accommodative stance on PE stimulus. •This study examines fiscal–monetary policy mix regimes in the Indian context.•Fiscal dominance was more prevalent in India during the sample period.•We augmented Taylor's rule with public debt to reflect fiscal dominance.•Public expenditure shock was more fruitful in a low-interest rate environment.•Public expenditure shock negatively affected the debt–GDP ratio.