The Active and Passive Fiscal-Monetary Policy Regimes and India’s Government Expenditure Shocks : Which Stand Matters the Most?

This paper employs the DSGE model with rich fiscal block to examine the asymmetries in the transmission and effectiveness of the government expenditure shock across the active fiscal and passive monetary policy (AFPM) regime and the active monetary and passive fiscal policy (AMPF) regime in the Indian economy. In the AMPF regime, the central bank actively targets inflation, and the fiscal authority ensures public debt sustainability. On the other hand, in the AFPM regime, the central bank weakly targets inflation and stabilizes public debt in the economy. With higher multipliers and debt rollover, the government expenditure stimulus has been more beneficial in the AFPM regime than in the AMPF regime. In the AMPF regime, the central bank has effectively neutralized the inflationary effects of the government expenditure shock. However, this neutralization has weakened the effect of the government expenditure shock on consumption, investment, and output. Based on the findings, the paper suggests the monetary authority to keep its stance accommodative when the fiscal authority injects government expenditure stimulus into the economy