ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
-A A +A

Interest Rate Targeting-Critical Role of Fiscal Stance

This paper examines the relationship between budget deficits, money creation and debt financing which suggests that interest rate targeting and inflation control are both monetary and fiscal policy issues. It then formalises these links within an analytical framework which, by highlighting the concept of the 'high-interest trap'. suggests that, for any given deficit, there exists optimal levels of monetisation and market borrowings. The model is then applied to evaluate the implications of the Union Budget 1998-99 and the results indicate that unless government borrowings are reduced substantially, the inflation rate would be much higher than what the fundamentals require it to be.

Subscribers please login to access full text of the article.

New 3 Month Subscription
to Digital Archives at

826for India

$50for overseas users

Get instant access to the complete EPW archives

Subscribe now


(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top