Thesis

I am pursuing my PhD under the supervision of Dr. Wasim Ahmad. I am expected to graduate by the end of the academic year 2023. 

PhD Thesis "Essays in Fiscal Policy"

Abstract

Fiscal policy dynamics have been at the forefront of debate and discussion. The recent evidence is the COVID-19 outbreak, when massive fiscal measures were announced to support the economy. However, macroeconomists have different opinions on the effectiveness and the multiplier effects of fiscal policy stance, and in this direction, this thesis is a valuable contribution, especially in the case of an emerging economy like India. Another dimension that this thesis covers is the fiscal-monetary interactions wherein the active and passive fiscal-monetary measures require a broader understanding than the existing wisdom on the developed economies.

The first chapter focuses on the dynamics of public expenditure multipliers, computes the time-varying public expenditure multipliers, and uses different structural factors to navigate that. The study finds the heterogeneity in time-varying transmission and effectiveness of revenue capital and total expenditure shocks. The chapter further finds the adverse effects of fiscal instability and trade openness on public expenditure multipliers. The short, medium, and long-term dynamics of expenditure multipliers further magnify the understanding of fiscal policy and its effectiveness during the study's different periods.

The second chapter traces the effectiveness of the public expenditure shock with the business cycle dynamically. The deflationary impact of the public expenditure shock and the subsequent accommodative response of interest rates exhibit a countercyclical public expenditure multiplier during the contraction period. Moreover, the large and significant negative impact of the public expenditure shock on inflation and the interest rate has resulted in a larger public expenditure multiplier during a supply-side recession than a demand-side recession.

The third chapter develops the medium-scale DSGE model with a 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 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, this chapter suggests the monetary authority to keep its stance accommodative when the government actively pursues aggressive fiscal expansion.