Responsiveness of Output & Prices to Monetary & Fiscal Shocks in India

The present study examines the impact of expansionary monetary and fiscal policies on the output gap, price level and real effective exchange rate in India during 2001:M4 to 2018:M7 using sign restricted Bayesian Vector Autoregressive modelling. Innovation accounting analysis indicates the fiscal dominance in India as fiscal policy intervention causes higher variations than monetary policy in output gap, price level and exchange rate. Since fiscal policy impulse does not have any significant impact on output gap, it has been observed that monetary policy is more effective than fiscal policy to target all the key variables in the Indian context. The study also finds that expansionary fiscal policy was followed by contractionary monetary policy by the Reserve Bank of India.