Modelling the role of fiscal and monetary policy instruments on carbon emission in non‐linear framework: A case of emerging economy

Abstract

India is the second most populous country in the world and stood at seventh rank in a major climate risk index in 2019, which is a grave concern for the Indian government, policymakers and environmentalists. Therefore, the present study examines the role of fiscal policy and monetary policy instruments along with select macroeconomic variables on carbon emission in India over the period 1971–2019 in the non‐linear framework. The outcome of the study reveals that the impact of fiscal and monetary policy instruments on carbon emission is asymmetric in nature. In addition, the positive and negative shocks in fiscal and monetary policy instruments have a positive and negative impact on carbon emissions, respectively. Based on the coefficients’ magnitude, the role of fiscal policy instruments has a more prominent effect on carbon emissions than monetary policy instruments. The findings of the study imply that the Indian government is required to implement green fiscal and monetary policies. Use fiscal policy to implement a ‘green tax ratio’ and a ‘green subsidy programme’ for manufacturers and investors to reduce CO2 emissions. A ‘green lending programme’ should be introduced for commercial banks by implementing monetary policy via the central bank.

Is fiscal deficit ‘curse’ or ‘haven’ for environmental quality in India? Empirical investigation employing battery of distinct ARDL approaches

“…The results of the MTNARDL model for model 3 and 4 demonstrated that the impact of extreme large changes in FD varies from the impact of moderate and low changes, validating the long-term asymmetry. The strand of literature [ 35 , 51 , [93] , [94] , [95] ] also confirmed that FD exhibits an asymmetric impact in the long term. For robustness, the study has employed the WALD test to investigate the asymmetry between the extreme large and extreme small changes in FD in both the short- and long-run.…”

“…Numerous studies have shown that a number of macroeconomic factors, including energy use, urbanisation, trade openness, and financial development, have a significant impact on environmental deterioration [ 35 , [50] , [51] , [52] , [53] , [54] ]. This section has presented the previous related literature on the nexus between the fiscal deficit and CO 2 emissions, and the nexus between other covariates and CO 2 emissions.…”

“…However, the results of the ARDL model are unable to prove whether there is a symmetrical or some asymmetric relationship involved between FD and CO2 in the Indian context. The existing literature argues that instead of a symmetric effect, FD has an asymmetric impact on other variables [ 35 , 51 , [93] , [94] , [95] ]. Therefore, we have employed the NARDL model with one threshold and decomposed the FD into two partial sums.…”

Economics of Fiscal Dominance and Ramifications for the Discharge of Effective Monetary Policy Transmission

“…While empirical studies contribute vital insights into the practical manifestations of these policies, this paper firmly anchors itself in the realm of economic theory. Notably, recent theoretical discussions, as exemplified by works like Mawejje & Odihambo (2022) and Sharma, Fatima, Alam & Bharadwaj (2023), emphasise the need for a robust theoretical framework to comprehend the intricate relationships between fiscal and monetary policies. Mawejje & Odihambo (2022) and delve into the theoretical nuances of fiscal dominance in a low-interest-rate environment, offering conceptual clarity on the challenges posed.…”

“…Mawejje & Odihambo (2022) and delve into the theoretical nuances of fiscal dominance in a low-interest-rate environment, offering conceptual clarity on the challenges posed. Sharma (2023) contributes to the ongoing theoretical discourse by exploring the nonlinear dynamics between fiscal and monetary policies. Thus, this 2 paper positions itself within the contemporary economic context, drawing on these theoretical advancements to deepen our understanding of the intricate theoretical dimensions of fiscal dominance and its implications for monetary policy transmission.…”