An Analysis of the Relative Effectiveness of Monetary and Fiscal Policies on Economic Performance in Jamaica: A Vector-Autoregression Approach

Abstract

The relative effectiveness of monetary and fiscal policies in stimulating real output in an underperforming economy (Jamaica), with high unemployment, interest and inflation rates, is investigated, using a modified St. Louis equation within a vector autoregression framework. The impulse response functions (IRFs) and variance decompositions (VDCs) are analysed to determine the impact of changes in monetary and fiscal policies, such as reflected in changes in the money supply and government expenditure, on movements in output. VAR results show that in separate equations, the negative impact of fiscal policy on output is similar to that of monetary policy. However, the simultaneous inclusion of both variables in one general equation indicated that real expenditure had a positive impact, while real money supply had a negative effect. The impulse response functions show that expenditure had an initial positive impact before turning negative, but money supply impacted output positively throughout.