LOW INTEREST RATES A BOOSTER

HOW MUCH DOES the monetary policy affect demand, especially at the state level? And how effective is increased government spending on economic output? An RBI Working Paper by Garima Wahi and Muneesh Kapur, focused specifically on state level data, seeks to give the answers. The author’s empirical analysis concludes that higher interest rates reduce demand and lower interest rates support economic activity, not only at the national level but also at state levels. More interesting is the effect of fiscal policy. Higher public investment boosts non-agricultural output while higher revenue and fiscal deficits crowd out private investment – and its effects are particularly felt in low-income states. Unlike other studies, the authors say their study could not find any benefits of higher fiscal deficit even in the short term.