Nexus between inflation and fiscal deficit: a comparative study of India and China
Journal of Chinese Economic and Foreign Trade Studies
ISSN: 1754-4408
Article publication date: 24 March 2022
Issue publication date: 27 May 2022
Abstract
Purpose
The purpose of this paper is to examine the deficit–inflation nexus in the two fastest growing economies, India and China, which happen to be crucial affiliates of the global growth generator countries apart from their association in Brazil, Russia, India, China, and South Africa.
Design/methodology/approach
The paper uses the prism of the vector auto regression framework, for the period 1985–1986 to 2016–2017 for both India and China. For this purpose, gross fiscal deficit, money supply, exchange rate, crude oil prices and output gap are examined as the key elements in the determination of inflation. The econometric framework used chiefly comprises of cointegration analysis, vector error correction model, Granger causality and impulse response functions.
Findings
The findings of this paper support the hypothesis that fiscal deficits are inflationary only in the Indian context and that the Ricardian equivalence cannot be negated for China at least in the short run. The results presented in the paper are a little agnostic about whether New Keynesian Phillips Curve (NKPC) explains the inflation dynamics in India, given that both inflation inertia and output gap are not robust. However, for the Chinese economy, NKPC along with structural theory is instrumental in describing trends pertaining to inflation during the period of the study.
Practical Implications
The paper warrants broader policy framework to aim at addressing structural bottlenecks to ensure non-inflationary growth keeping in mind the structural views on inflation. Furthermore, the paper fosters greater synthesis between monetary and fiscal policies, especially considering the global economic disruptions the world economy is subject to.
Originality/value
Considering there are only a limited number of studies on fiscal deficit of China, the present paper is of paramount significance in terms of growing concern over the sustainability of the growth process in China. Additionally, the paper is first-of-its-kind attempt to account the effectiveness of a healthy monetary–fiscal interface in achieving macroeconomic stability in India and China.
Keywords
Acknowledgements
The authors would like to thank anonymous referees and the Editor of the journal for their constructive suggestions and comments. The usual disclaimer applies.
Funding: The authors did not receive any funding to complete this study.
Citation
Kaur, G. (2022), "Nexus between inflation and fiscal deficit: a comparative study of India and China", Journal of Chinese Economic and Foreign Trade Studies, Vol. 15 No. 2, pp. 193-216. https://doi.org/10.1108/JCEFTS-07-2021-0028
Publisher
:Emerald Publishing Limited
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