Asymmetric Effects of Fiscal Deficit on Inflation: Evidence from India

Abstract

This study examined the asymmetric effect of fiscal deficit, money supply, and exchange rate on inflation over 1991-2016. The study employed the Non-Linear Autoregressive Distributive Lag Model (NARDL) to achieve the objectives. The results provided evidence in favour of the asymmetric effect. Further, the results showed the positive and negative changes in fiscal deficit on inflation differently. The results also highlighted that the money supply created an inflationary situation more than the fiscal deficit, whereas the exchange rate promoted inflation. So, the policy maker should be much bothered about money supply rather than a fiscal deficit as it has a relatively more positive effect on inflation, it could be an important policy implication of the study.