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There are growing consensuses regarding the efficiency and efficacy in the use of fiscal policy in stabilization, redistribution and also in the conduct of monetary policy. Despite inadequate revenues in the fiscal system to match the aggregate spending of the Government, the issue of deficit financing is not meaningfully addressed. A well-designed fiscal stimulus measures are prerequisite for those economies, including India, where fiscal space is perceived to be limited. This study is a modest attempt to capture the dynamic links between the Government deficits and interest rates through Hsiao based Granger causality. The evidences based on quarterly as well as on annual data clearly demonstrate the one-way causality from fiscal deficit to interest rate. Other possibilities of causality are ruled out as per the estimates produced.
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