Relative effectiveness of monetary and fiscal policies on output growth in Turkey: an ARDL bounds test approach

Abstract

Research background: Effects of monetary and fiscal policy on output growth has been one of the major topics that economists have been investigating. Monetary and fiscal policies are tools for economists and policymakers to correctly direct the economy and facilitate the growth and development of the country. Accordingly, it is critically important for policy-makers in the area of economy to study the efficiency and the effectiveness of such policies. But, so far, there has been no generally accepted evidence suggesting the effectiveness of either the policy in Turkey or around the world. Instead, the dominance of either policy is subject to a change period to period and country to country.
 Purpose of the article: The purpose of this study is to analyze the growth effectiveness of fiscal and monetary policies and then determine which of these two policies is more powerful in promoting economic growth in Turkey over the period 1998 and 2016.
 Methods: To investigate the growth effectiveness of monetary and fiscal policies, we use some of the time series econometric techniques, such as ARDL Bounds testing, structural break unit root tests and Granger causality tests.
 Findings & Value added: Monetary policy variable is creating only short-run effects on growth; but, it’s not causing any Granger causality on it. On the other hand, fiscal policy variable has a long-run significant effect and causing to growth. Thus, the fiscal policy seems to be more effective than monetary policy during examination period, implying the rethinking the implementation of both policies in Turkey. To the best of our knowledge, this study is the first attempt to investigate the relative effectiveness of economic policies on growth in Turkey in terms of both methods used and period chosen.

Analysis of the Relative Impact of Monetary and Fiscal Policies on Economic Growth in Ethiopia, Using Ardl Approach to Co-Integration: Which Policy Is More Potent?

“…As pointed out in (Özer & Karagöl, 2018), The relationship between fiscal and monetary policies and growth has conducted a lot of number of empirical investigation come up with mixed conclusion across different cross sectional, time series and panel data, such as, OLS, Panel data models, VAR model, VEC Model and ARDL Model. The majority of the finding confirmed that fiscal and monetary policies are certainly affect growth.…”

“…Similarly, the study conducted by Özer and Karagöl (2018) who analyzed the relative growth effectiveness of fiscal and monetary policies in Turkey over the period 1998 and 2016 by using the techniques of ARDL Bounds testing, structural Granger causality tests and their result indicates that Monetary policy variable is creating only short-run effects on growth; but, does not cause any Granger causality on it, that is fiscal policy variable has a long-run significant effect and causing to growth. As result they concluded that the fiscal policy seems to be more effective than monetary policy during examination period, implying the rethinking the implementation of both policies to achieve past economic growth.…”

“…To determine the result of the test, the Wald-test (F-statistic) was employed. As mentioned detail in Özer and Karagöl (2018), the asymptotic distribution of the F-test is non-standard under the null hypothesis of no co-integration among the variables, and rely on either variables incorporated in the ARDL model are I(0) or I(1), the number of explanatory variables, whether the ARDL model contains an intercept and/or a trend; and the sample size. Pesaran and Shin (1998) and Pesaran, Shin and Smith (2001).…”

“…Moreover, more recent global recession occurrence since 2008 financial crisis have acknowledged a renewed debate about the relative effectiveness of monetary and fiscal policies on economic activity though there had been widely believed statement among different scholars that implementing fiscal policy is more complex process and controversy than applying monetary policy instrument which is easily managed and controlled by certain authorized body in behalf of government (Sen & Kaya, 2015). In contrast to aforementioned argument, as is mentioned by (Guerguil, Mandon & Tapsoba, 2017) and (Özer & Karagöl, 2018), due to large and prolonged growth and employment costs of the crisis, monetary policy has limited effect when interest rates are wedged at the zero lower-bound, and the essential of increased public expenditure to tackle a "secular stagnation" in this economic phenomena, there is a tendency of agreement among economists and policy makers for the powerfulness of fiscal policy as a countercyclical macroeconomic policy tool.…”

“…The early seminal paper by Andersen and Jordon (1968) developed empirical policies debate on issue that which police is more powerful and effective in effecting output growth. In throughout literature review, still there is no credible evidence-based empiric has been found in relation to the relative effectiveness of monetary and fiscal policies on economic activity (Özer & Karagöl, 2018).…”