Public Financial Policies in a Transitory Economy - an adaptive control model for India

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The purpose of this paper is to formulate a financial policy model for the Indian economy incorporating the expectation generating mechanism. The aim is to see how financial policies and private sector expectations will change in response to each other. In a mixed economy, planning has to take into account how the private sector formulates and revises its expectations regarding various government policies and their possible impacts on the endogenous variables (or target variables) in the economy. Normally in an economy like In-dia, the government formulates its plan for the public sector over the next five years. The govern-ment can regulate the private sector by various means, such as licences, investment quotas, tax-subsidy rates, bank interest rates and by various fiscal controls. The private sector, knowing the targets of the government, formulates its own expectations regarding fulfilments of the targets (because it never expects that the government can fulfil its targets exactly) and possible movements of various policy variables. It behaves according to its expectations and realsation of past expectations and thus allocates its resources. So the optimum designs of public Policies should be to direct the private sector towards the desired goals as defined by the planners taking into account the reactions of the private sector. The purpose of the public policy in such an en-vironemnt should be to formulate different fiscal instruments regarding public budget, tax rate, government sales, foreign borrowing and public lending policies so that the private sector would react in the desired way given the goal set by the planners regarding national income, balance of payments, domestic absorptions and prices.
長崎大学の論文

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Basu Dipak
長崎大学経済学部

Public Financial Policies in a Transitory Economy - an adaptive control model for India

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