How Does Economic Growth React to Fiscal Deficit and Inflation? An ARDL Analysis of China and India

Abstract

Stabilization is a vital component of transition. Transition economics is a change from a centrally planned economy to free market. In 21st century, India and China are the world's fastest growing economic countries. This paper compares transition economic relationship in terms of inflation and growth in India and China. Data has drawn from IMF. Macroeconomic parameters clearly confirm that both Chinese and Indian economies are against inflationary capacity constraints. After transition, inflation does affect on growth rates in a long run in both countries since 1979 to 2009. As a result, both countries have growth and inflation rates negative correlation. However, we can also see much higher fiscal deficits are associated with higher inflation its result lower growth.

The Assessment of Fiscal Deficit on Economic Growth in Transition Countries of South-Eastern Europe

“…In the Ricardian perspective, fiscal deficits are seen as neutral in terms of their growing impact. Deficit budget financing comes only through tax deferrals (Mohanty 2012). Barro (1989) presented this reverse approach as the Ricardian Equivalence Hypothesis (REH).…”