Central Bank Independence and its Impact on Fiscal Deficit: Evidence from India

Ahmad Bhat Aijaz (), Iqbal Khan Javaid (), Ahmad Bhat Sajad () and Ahmad Parray Waseem ()
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Ahmad Bhat Aijaz: Department of economics, University of Kashmir, Kashmir, India
Iqbal Khan Javaid: Department of economics, University of Kashmir, Kashmir, India
Ahmad Bhat Sajad: Department of economics, University of Kashmir, Kashmir, India
Ahmad Parray Waseem: Department of economics, University of Kashmir, Kashmir, India

Studia Universitatis „Vasile Goldis” Arad – Economics Series, 2023, vol. 33, issue 2, 71-94

Abstract: The paper explores the relationship between Central bank independence (CBI) and fiscal deficit in India. Moreover, the study tries to assess the impact of CBI on the levels of fiscal deficit. The study incorporates other variables like Gross Domestic Product, financial development, and trade openness to analyze their impact on the fiscal deficit. The study employed Auto-regressive distributed lag model (ARDL) Bounds test developed by Pesaran, Shin, and Smith (2001) to examine the long-run relationship between CBI and fiscal deficit. The study also employs a legal index for measuring CBI developed by Jasmine et al (2019) as well as an actual measure of independence developed by Cukierman (1992) to measure CBI in India. The study confirms the long-run relationship between the CBI and fiscal deficit as well as among other variables. An increase in the levels of CBI leads to falling in the levels of fiscal deficit. The other explanatory variables used in the study also confirm the long-run relationship and impact fiscal deficit negatively except for trade openness, which positively impacts the fiscal deficit.

Keywords: Central bank independence; Indian Economy; Fiscal deficit; Turnover rate; Cointegration (search for similar items in EconPapers)
JEL-codes: E42 E43 E58 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:suvges:v:33:y:2023:i:2:p:71-94:n:1

DOI: 10.2478/sues-2023-0009

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