Beyond the basics: mapping the inflation response to fiscal deficit in India with smooth transition autoregressive model
- Title
- Beyond the basics: mapping the inflation response to fiscal deficit in India with smooth transition autoregressive model
- Creator
- Tariq A.; Bashir S.; Amin A.
- Description
- Purpose: Indias historical fiscal performance has featured elevated deficit levels. Driven by the imperative need for fiscal stimulus measures in response to the crisis, efforts toward fiscal consolidation from 2003 to 2008 were reversed in 20082009 due to the financial crisis. These stimulus actions are believed to have wielded a notable influence on inflation dynamics. Presumably, a high inflation rate hinders growth and inflicts severe welfare costs. Accordingly, the principal objective of this paper is to scrutinise the threshold effects of fiscal deficit on inflation within the context of the Indian economy. Design/methodology/approach: We employed the Smooth Transition Autoregressive (STAR) Model, a robust tool for capturing non-linear relationships, to discern the specific threshold level of fiscal deficit. Our analysis encompasses annual data spanning from 1971 to 2020. Additionally, we have leveraged the Toda-Yamamoto causality test to establish the existence and direction of a causal connection between fiscal deficit and inflation in the Indian economy. Findings: Our analysis pinpointed a critical threshold level of 3.40% for fiscal deficit, a value beyond which inflation dynamics in India undergo a marked transition, signifying the presence of significant non-linear effects. Moreover, the results derived from the Toda-Yamamoto causality test offer substantiating evidence of a causal relationship originating from the fiscal deficit and leading to inflation within the Indian economic framework. Research limitations/implications: The findings of our study carry significant implications, particularly for the formulation and execution of both fiscal and monetary policies. Understanding the threshold effects of fiscal deficit on inflation in India provides policymakers with valuable insights into achieving a harmonious balance between these two critical economic variables. Originality/value: To the best of our knowledge, this study is the first of its kind to empirically investigate threshold effects of fiscal deficit on inflation in India from a non-linear perspective using the Smooth Transition Autoregression (STAR) model. 2024, Emerald Publishing Limited.
- Source
- Journal of Economic Studies, Vol-52, No. 2, pp. 322-341.
- Date
- 2025-01-01
- Publisher
- Emerald Publishing
- Subject
- Causality; Fiscal deficit; Indian economy; Inflation; STAR; Threshold effects
- Coverage
- Tariq A., Department of Economics, Central University of Kashmir, Ganderbal, India, Department of Data Science, Christ University, Bengaluru, India; Bashir S., Department of Data Science, Christ University, Bengaluru, India, School of Management, Mahindra University, Hyderabad, India; Amin A., Department of Economics, Central University of Kashmir, Ganderbal, India
- Rights
- Restricted Access
- Relation
- ISSN: 1443585
- Format
- Online
- Language
- English
- Type
- Article
Collection
Citation
Tariq A.; Bashir S.; Amin A., “Beyond the basics: mapping the inflation response to fiscal deficit in India with smooth transition autoregressive model,” CHRIST (Deemed To Be University) Institutional Repository, accessed February 24, 2025, https://archives.christuniversity.in/items/show/12491.