A Reply to A Reply

It is nice to receive a reply from Prabhat Patnaik to our rejoinder (EPW, May 12, 2001) to his article (‘On Fiscal Deficits and Real Interest Rates’, EPW, April 14, 2001), as it gives us an opportunity to clarify further our position. Let us state upfront that we do not agree, as he claims, with his “weak proposition that there is no theoretical justification for cutting the fiscal deficit as a means of lowering the interest rate” as it applies to the Indian situation. In India, which has a partially open economy (some capital controls) and a floating exchange rate regime (a managed float), cutting the fiscal deficit should theoretically lower the interest rate....