Journal Press India^®

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Monetary policy and fiscal policy have their own perspective towards maintaining economic stability of the country. However, for a well- functioning economy, they need to work in coordination with each other. In this paper we are empirically examining the interaction between monetary and fiscal policy by using Vector Error Correction Model (VECM) for the period of April 2010 to March 2015. The study also discusses game theoretic approach to know about the strategic interaction between monetary and fiscal policy. The study uses change in gross fiscal deficit and output to represent fiscal policy and inflation and interest rate to represent the monetary policy. The results indicate that fiscal policy responds well to any changes in monetary policy but reverse is not taking place.

Keywords

Monetary policy, Fiscal policy, Vector Error Correction Model (VECM)

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