Revisiting the Dynamics of the Fiscal Deficit and Inflation in India: the Nonlinear Autoregressive Distributed Lag Approach

The chronic government deficit (fiscal deficit) and increase in the price level (inflation) have become major concerns for economists policymakers. While numerous studies examined twin problems of fiscal inflation both developed developing economies, their results are inconclusive due to different estimation techniques, chosen time periods, selection variables, etc. Therefore, we deficit-inflation nexus India period from 1980–81 2016–17 by employing Autoregressive Distributed Lag (ARDL) Nonlinear (NARDL) approaches. ARDL approach found no evidence linear relationship between Indian context. Further, empirical findings NARDL model confirmed nonlinear long run association money supply inflation, supporting ideas Fiscal Theory Price Level (FTPL) case India. FTPL postulates that public debt taxation policies drive level; monetary policy has an indirect role only. policymakers should focus on reducing deficits. Simultaneously, Reserve Bank (RBI) regulate lending interest rate so a mix can be applied controlling