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The 2016 book titled “Fiscal Consolidation, Budget Deficits and the Macro Economy”, by Lekha Chakraborty,  is a welcome addition to the growing literature that deals with fiscal policy in specific countries, focusing on the longer run and on fiscal consolidation, rather than on a short run and countercyclical perspective. The book is focused on developments over recent decades in India, an important, emerging  country undergoing fast growth. In spite of India’s importance, its fiscal experience had not attracted until now the full and sophisticated attention that it deserved.
Dr. Chakraborty’s book is both a useful description of macroeconomic, fiscal theory and an application of prevalent theory to Indian fiscal developments. The book consists of nine chapters. They address issues at both the Central and the subnational government level, in a country that is highly decentralised and where subnational governments have played a significant and distinct fiscal role.
Several hotly debated relationships are analysed theoretically and are tested empirically. Among these are: the connection that exists between fiscal deficits and capital formation. Do fiscal deficits finance or crowd out public and private capital formation? What links are there between fiscal deficits and financial markets? Do fiscal deficits cause interest rates to rise? Has monetary policy become dependent on fiscal policy? Did monetary  “seigniorage” help finance public spending? Was there a connection between the composition of deficits and monetary seigniorage; and, what about that between the size of fiscal deficits and the rate of inflation?
All these important relationships are discussed theoretically and tested empirically. The analysis is always sophisticated and relevant for the specific conclusions reached; and the conclusions are not always obvious.
A final chapter addresses the recent revival of fiscal activism, an activism that in earlier decades had challenged the arguments that had been used to challenge the use of Keynesian fiscal policy that had been based on theoretical considerations such as Rational Expectations, the Ricardian Equivalence hypotheses and others. The debate is still raging. Dr. Chakraborty describes what is called the “new view on fiscal policy”.
To conclude this is an interesting and useful book by a sophisticated economist that will be welcome by many readers. Not all will agree with all its conclusions, but all with be informed and will learn from it.
The author is Vito Tanzi, Former director of the IMF Fiscal Affairs Department is an expert economist with extensive experience in academia, government and international institutions. In addition to serving as a senior consultant to the Inter-American Development Bank from 2003-2007, Tanzi has consulted for the World Bank, the United Nations, the European Commission, the European Central Bank, the Asian Development Bank, the Economic Commission for Latin America and the Organization of American States. Click here for detailed profile.
The author is an external contributor and is not an NIPFP member. The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.


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