Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324847 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. 1085
Publisher: 
Levy Economics Institute of Bard College, Annandale-on-Hudson, NY
Abstract: 
Using high-frequency macro data from a financially deregulated regime, this paper examines whether there is any evidence of financial crowding out in India. The macroeconomic channel through which financial crowding out occurs is the link between the fiscal deficit and the interest rate determination. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, a fact which reinforces that the term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows and inflation expectations, while inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyze the effect of a high-interest-rate regime on public corporate investment. Our results showed that public infrastructure investment and rate of interest are significant determinants of private corporate investment. Our results counter the popular belief that deficits determine interest rates in the context of emerging economies and "crowd out" private corporate investment.
Subjects: 
fiscal deficit
interest rate determination
asymmetric vector autoregressive model
financial crowding out
JEL: 
E62
C32
H6
Document Type: 
Working Paper

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