The Macroeconomic Impact of Fiscal Policy Shocks: What do the Indian Data Say?

This article examines the impact of fiscal policy shocks on a set of macroeconomic variables in India, using a seasonally adjusted quarterly dataset for the period 2003–2019. The Gregory-Hansen residual-based test for cointegration and the vector error correction model (VECM) are applied, and impulse responses based on a recursive identification scheme (Cholesky decomposition) is used to assess the effects of a gross tax revenue shock and a government spending shock on economic activity, while accounting for the possibility of structural breaks. The findings indicate that an unexpected fiscal policy shock has an immediate expansionary impact on real GDP and a sudden positive effect on inflation (WPI) and the repo rate; and that the impact is permanent and away from the zero equilibrium. The careful design of policies by the central bank and the government as crucial macroeconomic stabilisation tools is imperative. JEL Classification: E6, H20, H30

• Publication year

  2022

• Venue

  Margin: The Journal of Applied Economic Research

• Publication date

  2022-02-01

• Fields of study

  Not labeled

• Identifiers
  DOI 10.1177/09738010211067386
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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