Relative effectiveness of monetary and fiscal policy in India

There has been a long series of debate over the relative effectiveness on the monetary and fiscal policy. The monetarists believed that money supply played an important role in determining economic performance while Keynesian claimed that to stabilize the economy fiscal policy is essential and plays an significant role.. While a macroeconomic policy regime consists of the monetary and fiscal policy strategies that are implemented, the monetary and fiscal policy strategies are interacting and their joint implementation affects macroeconomic adjustments. To determine which proposition was correct many studies have been undertaken. The debate of relative effectiveness emerged gradually in the late 1950s and fully focused by 1963 when a conference on monetary policy was organized by the “National Bureau of Economic Research in Pittsburgh”. It was the time when there were many critical responses of an increasing number of economists to the prevailing Keynesian analysis of fiscal and monetary policy. In the present study an attempt has been made to analyze the relative effectiveness of monetary and fiscal policy in India during post reform period. To analyze the relative effectiveness of both policies, regression analysis has been run. GDP has been taken as a dependent variable. For monetary policy, M3 and bank rate have been chosen as independent variables while for fiscal policy, government expenditure and income tax rate have been selected. Results of the analysis show that though monetary policy is also effective but its effectiveness is less in comparison to fiscal policy.