Estimating India's Fiscal Reaction Function

In the 1970s-1980s, monetary authorities were usually more active than their fiscal counterparts. After some crises, fiscal policy is currently regaining its role in implementing economic policies. As a sequel to estimating the Indian monetary reaction function, this paper models and estimates a fiscal reaction function for India as a part of a macro model for India. Unlike other papers about fiscal reaction func tions which are mainly empirical-based, this paper first establishes the theoretical foundations for the empirical estimation. In estimating India's fiscal reaction function, data stationary problems are found and unbalanced regressions are employed. This paper finds that India's fiscal policy depends on debt, output gap, and interest rate levels. Apart from debt and output gap which were mentioned in other papers, the interest rate is the new element in the function and should be important in any borrowing action. The estimated fiscal reaction function tracks the actual reaction function very closely.