Interaction of monetary and fiscal policies in India a game theory approach

Abstract

The present study is an endeavour to analyse the interaction of monetary and fiscal policies in India from 2001:M4 to 2017:M12 through appropriate pay-offs and strategies under Game theory framework. To attain the objectives, the Cooperative and Non-cooperative Games between monetary and fiscal authorities have been constructed using Sign restricted Bayesian Vector Autoregressive (VAR) Model and Structural Sign restricted VAR Model. Besides, the effects of individual moves of both monetary and fiscal policies on all the component variables have also been examined and found significant. The outcomes derived from the empirical analysis expose that monetary policy has been exercised in the same direction as the fiscal policy. Moreover, same policy moves in case of Non-cooperative Game and in case of cooperative game, policy moves under monetary leadership either in same or opposite directions according to the state of affairs of the economy can avoid clash. newline