Interaction Between Monetary and Fiscal Policy: Empirical Evidence from India

Abstract

Monetary policy and fiscal policy has their own perspective towards maintaining economic stability of the country. So our general idea is that they work individually without the support of other one. But in practically for good functioning one policy it need a cooperation of other policy. In this paper we are empirically examining the interaction between monetary and fiscal policy by using Vector Error Correction Model (VECM) from the period of April 2010 to March 2015. The study also discusses game theoretic approach to know about the strategic interaction between monetary and fiscal policy. The study uses change in gross fiscal deficit and output to represent fiscal policy and inflation and interest rate to represent the monetary policy. As a result, study finds that fiscal policy well respond to any changes in monetary policy but reverse is not taking place.