Tuesday, February 7

This Time (It) Is Different: Deficit Monetization during an Epidemic is not Fiscal Profligacy

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By Sabyasachi Kar & Siddharth Naidu

There is a strong consensus among Indian policy experts that the government will have to come up with a significant stimulus to combat the Covid-19 epidemic. Most also argue that a sizeable part of this expenditure will have to be funded by the RBI, i.e., the deficit will have to be monetized. This argument however, has met with some opposition from other experts, and currently, the government and the RBI also seems reluctant to go down this path. The Indian government’s reluctance to monetize our deficits is, at least partly, due to our experience with this practice in the past, when it became closely related to fiscal profligacy.

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