The Impact of Monetary and Fiscal Policies on Real Output: A Re-examination

Abstract

Research continues to investigate the relative efficacy of monetary and fiscal policies for stabilizing the US economy, a debate that began with Anderson and Jordan's well-known study. This paper examines the contention of Senbet that monetary policy matters for stabilizing real economic activities; fiscal policy does not. We show that this claim is unfounded and apparently the outcome of prematurely dismissing fiscal policy from the cointegrating vector. In the context of a properly specified model, results we obtained from cointegration and error-correction tests using data and time period similar to Senbet's consistently suggest that only fiscal policy Granger-causes real output over the long-run. Moreover both monetary and fiscal actions Granger-cause significant short-run effects on the real side of the economy.

Relative Effectiveness of Monetary and Fiscal Policies on Output Stabilization in Developing Countries: Evidence from Rwanda

“…The empirical evidence supporting the traditional Keynesian view, finds that fiscal policy shocks have clear positive effects on output, consumption and/or employment (Dungey & Fry, 2007;Galí et al, 2007;Giordano et al, 2008;Romer & Romer, 2010;Okorie et al, 2017;Darrat et al, 2014;Mutuku & Koech, 2014). There are also contrasting findings showing that expansionary fiscal policy could generate adverse effects on some ijef.ccsenet.org International Journal of Economics and Finance Vol.…”

“…If recession occurs, two principles sets of tools can be used by policy makers to affect aggregate economic activity: fiscal policy, the control of government spending and taxes and monetary policy, the control of interest rates or the money supply (Mishkin, 2012). While empirical studies using monetarist models suggest that monetary actions have a greater impact on economic activities of the developed countries (Anderson & Jordan, 1968;Senbet, 2011;Bruce & Tricia, 2002), studies using structural models suggest that fiscal actions appear to have a dominant influence on economic activity in these countries (Darrat et al, 2014;Galí et al, 2007). The differences in the results of various studies suggest that none of the policies can be thought of as superior to the other, and their relative effectiveness depends on the prevailing economic and political conditions.…”