Fiscal policy is a fundamental choice to ensure macroeconomic stability: A theoretical analysis

Purpose This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY2004/2005:Q1-FY2015/2016:Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization. Outcomes of monetary and fiscal authority commitment to policy instruments, interest rate, government spending and taxes, are evaluated using Taylor-type and optimal simple rules. Design/methodology/approach The study extends the stylized micro-founded small open economy New Keynesian DSGE model, proposed by Lubik and Schorfheide (2007), by explicitly introducing fiscal policy behavior into the model (Fragetta and Kirsanova, 2010 and Çebi, 2011). The model is calibrated using quarterly data for Egypt on key macroeconomic variables during FY2004/2005:Q1-FY2015/2016:Q4; and Bayesian methods are used in estimation. Findings The results show that monetary and fiscal policy instruments in Egypt contribute to economic stability through their effects on inflation, output and debt stock. The monetary policy Taylor rule estimates reveal that the Central Bank of Egypt (CBE) attaches significant importance to anti-inflationary policy and (to a lesser extent) to output targeting but responds weakly to nominal exchange rate variations. CBE decisions are significantly influenced by interest rate smoothing. Egyptian fiscal policy has an important role in output and government debt stabilization. Additionally, the fiscal authority chooses pro-cyclical government spending and counter-cyclical tax policies for output stabilization. Again, past values of the fiscal instruments are influential in the evolution of the future fiscal policy-making process. Originality/value A few studies have examined the interaction between monetary and fiscal policy in Egypt within a unified framework. The presented paper integrates the monetary and fiscal policy analysis within a unified dynamic general equilibrium open economy rational expectations framework. Without such a framework, it would not be easy to jointly analyze monetary and fiscal transmission mechanisms for output, inflation and debt. Also, it would be neither possible to contrast the outcome of monetary and fiscal authorities commitment to a simple Taylor instrument rule vis-à-vis optimal policy outcomes nor to assess the behavior of monetary and fiscal agents in macroeconomic stability in context of an active/passive policy decisions framework.

Fiscal and monetary policy plays a vital role in macroeconomic stability. The Keynesians have emphasized the fiscal policy whereas the Monetarists supported interventions under monetary policy. In fact, these policies are interrelated and influence each other. The expansionary fiscal policy overheats the economy and reduce the effectiveness of monetary policy. The use of the appropriate mix of tools under fiscal and monetary policy is of immense importance for economic stability under country specific economic conditions. Therefore, the instant study was meant to look at the effectiveness of monetary and fiscal policy instruments in stabilization of Pakistan’s economy. The data was collected from secondary sources of Government of Pakistan from 1986 to 2022. The government expenditure was analyzed to be a proxy for fiscal policy whereas money supply for monetary policy. The study employed Impulse Response Function (IRF) and Variance Decomposition (VDC) in Vector Autoregressive (VAR) Model. The findings of IRF confirmed the impact of money supply on economic growth in Pakistan. At first, the money supply affected the GDP negatively but after 3rd year, its impact was changed to be positive and it was rising sharply. It indicated that the expansionary monetary policy was effective in the medium and long run in Pakistan. It was concluded that the fiscal policy appeared to be relatively more effective for its contribution towards economic growth as compared with monetary policy.

This study examines whether economic stability in Indonesia capable predicted by the model Mundell-Fleming. Prediction proxy stability of the interaction of fiscal and monetary policy. During Indonesia's economic stability is largely determined by the strength of economic fundamentals, while economic fundamentals are strongly influenced by fiscal and monetary policies. Therefore flemming Mundell predicts how strong the economic stability in Indonesia ?, the statement in the analysis by using a long-term predictions are Vector Autoregression. Research findings indicate patterns of interaction predictions variety of fiscal and monetary policy, both short term, medium term and long term. It turned out that fiscal policies are derived from taxes are more effective than government spending to control economic growth, investment and inflation, but government spending is more effective to control the exchange rate. The monetary policy of interest rates more effectively control the exchange rate and inflation, while the money supply is more effective in controlling the growth of economy and investment. Keyword:Mundell-Fleming, Macroeconomic Stability, Fiscal Policy, Monetary Policy.

s from short-run shocks, and which is capable of highlighting many important interactions between fiscal and monetary policies. We look at both the steady-state and the stability properties of the system. The analysis is especially relevant for cases where fiscal and monetary policies are decided with reference to different objectives, possibly by different authorities. It may be less useful for cases which one type of policy (e.g., fiscal policy) is given absolute priority (e.g., the fiscal authority behaves as a Stackelberg leader) and monetary authorities are forced to behave ways that ensure the maintenance of fiscal policy. The latter was what Sargent and Wallace had mind when they derived the path of the money stock and of inflation necessary to maintain fiscal policy settings [7]. The interesting literature that emerged along those lines was surveyed by Haliassos and Tobin [6]. The analysis introduces some new perspectives on policies aimed at attaining an acceptable inflation rate over the longer run. When a monetary authority maintains a target rate of inflation over the longer run, it also fixes the long-run real rate of return on money which is directly linked to inflation when money bears a zero (or an institutionally fixed) nominal interest rate. As a result, the size of the long-run inflation target generally affects the equilibrium composition of the total government debt, i.e., the ratio of money to government bonds. A sustainable monetary policy is one which not only fixes the rate of growth of nominal money to equal the target inflation rate plus the rate of growth of real GNP, but which additionally ensures that the equilibrium composition of government debt will be attained over the longer run. Otherwise, the system does not get onto its steady state, and the package of fiscal and monetary policies is not sustainable over the longer run. From this point of view, simple monetary policy rules targeting inflation, such as Friedman's x % rule, are not general sustainable, because they only fix the slope of the money path, without ensuring that the composition of government debt gets to the appropriate steady-state level. This point has implications for the interaction between fiscal and monetary policies. The steady-state equilibrium composition of government debt is not influenced only by the size of the inflation target, but also by fiscal policy settings. A change fiscal policy alters the equilibrium composition of government debt that the monetary authority has to bring about through its open market operations if it does not want to abandon its inflation target. Changes fiscal policy for a given inflation target also have effects on the long-run capitaloutput ratio, unless the conditions for debt neutrality are met. With regard to government spending on goods and services, G, the question is whether crowding out of private capital is unavoidable. The possibility that capital may be crowded in by higher ratios G/Y has been noted by Tobin and Buiter and by Friedman, but not under inflation targeting [9; 3; 4]. In fact, the present paper shows that crowding may still be observed situations where the mechanisms identified by the previous authors cannot operate. In particular, the mechanism whereby an increase government expenditure leads to crowding existing models is by raising the steady-state rate of inflation, thus lowering the real rate of return on money. This produces effects on the demand for money and for government bonds that create room portfolios for the extra holdings of capital. However, when inflation is set at a target level, this channel is not open. What can still happen is higher short-run inflation the transition to the steady state, so that the level of the steady-state price path ends up being higher while its slope is still equal to the long-run inflation target. This possibility is demonstrated here. The above effects on the capital-output ratio presuppose that complete debt neutrality does 1011 This content downloaded from 157.55.39.209 on Sat, 14 May 2016 06:30:33 UTC All use subject to http://about.jstor.org/terms 1012 Michael Haliassos not hold. If it does, then cuts current taxes would have no effect on the capital-output ratio. The work of Barro [2] inspired a voluminous theoretical literature on debt neutrality (or Equivalence). Haliassos and Tobin [6] present a comprehensive account of the literature exploring the restrictive conditions under which the neutrality theorem holds. The present analysis of sustainability adds a new dimension to the debate. Suppose that agents believe debt neutrality and save the current tax cut, so as to raise their bequests to descendants and to eliminate any effects on their utility arising from future tax increases. Then, the question is whether taxes will indeed have to go up the future, i.e., whether current fiscal policy is sustainable or not. If it is, Ricardian behavior on the part of agents is not rational, since the expectation that taxes will have to rise the future leads to behavior which violates it. It turns out that Ricardian equilibria are not necessarily rational, while one can also construct non-Ricardian equilibria which are rational. Section II presents an illustrative model for analyzing sustainable fiscal and monetary policies. Section III investigates the requirements for a sustainable monetary policy targeting inflation. Section IV discusses the interactions of fiscal and monetary policies and the implications of inflation targeting for crowding out or crowding of private capital. Section V investigates the rationality of Ricardian behavior. Section VI offers concluding remarks. The Appendix contains a formal derivation of comparative statics and stability results. II. An Illustrative Model The economy to be considered is one which fiscal policy rules are decided with reference to different objectives from those of monetary policy, which is aimed at maintaining a target inflation rate over the longer run. According to the notion of sustainability introduced here, if the combination of fiscal and monetary policies is unsustainable, the economy cannot attain a steady state by following those policies. This is either because a steady state does not exist or because it is not stable. If the government persists following those policies, then the economy is likely to get onto an unstable trajectory. It is difficult to describe precisely what will be observed if this is allowed to happen. A plausible doomsday scenario might be that we would experience a stock market crash, for example. However, it seems more likely that policy authorities will not allow the economy to reach such a point. After realizing that their policies are unsustainable, they are likely to reverse them, e.g., by abandoning their inflation target or by reducing the deficit-to-GNP ratio. Here, we highlight some general principles for detecting unsustainable policy mixes. The points can be made by employing a relatively general macroeconomic structure which explicitly allows for asset accumulation. Consider a closed economy with three assets: high-powered money, H, government bonds of total nominal value B, and claims to homogeneous physical capital K, one for each unit of capital. All asset stocks are measured per efficiency unit of labor. The fiscal policy instruments are (i) the ratio of real government expenditure on goods and services, G/Y, and (ii) the average tax rate, t, which is the ratio of total taxes net of transfers (T) to GNP. The primary budget deficit to GNP ratio is then G/Y t. Fiscal authorities issue bonds to finance the total budget deficit, while the monetary authorities determine the degree of monetization and the overall composition of accumulated government debt, H + B, through their open market exchanges of money for bonds.' 1. This is different from saying that the monetary authorities can exogenously fix the fraction of the deficit which is monetized. It will be seen below that this fraction is dictated by inflation targeting steady state. This content downloaded from 157.55.39.209 on Sat, 14 May 2016 06:30:33 UTC All use subject to http://about.jstor.org/terms SUSTAINABILITY, INFLATION TARGETING, AND CROWDING OUT

This chapter reviews fiscal developments and policy issues in Mediterranean countries1 and their implications for macroeconomic stability and the conduct of monetary policy. Some references are made to oil-centred economies in the Gulf region that face similar issues to those faced by oil-exporters in the Mediterranean region. Fiscal policy is a crucial factor in determining a country’s overall economic performance via its effects on allocation, stabilisation and distribution, and constitutes a key component of macroeconomic policies alongside monetary and exchange rate policy. There are at least two reasons why fiscal developments are of great relevance from the perspective of monetary policy. 1) Governments may resort to the central bank for the financing of public deficits rather than borrowing in capital markets and thus fuel inflation. This is more likely the less developed the domestic capital markets, the more severe the impediments and disruptions in accessing international capital markets and the less independent central banks are, and thus appears particularly relevant for developing and emerging market economies. 2) Even in the absence of monetary financing, fiscal policy can have a large impact on the economy via its effects on interest rates, the exchange rate and aggregate demand, as well as on expectations, in particular as regards the sustainability of public debt. Perceptions of the sustainability of fiscal policy can have an impact on financial markets and, if negative, can interfere with the objectives of monetary and exchange rate policy, such as achieving and preserving price stability, financial stability or maintaining an exchange rate peg. In the extreme case, fiscal dominance of monetary policy can lead to a situation in which a central bank is no longer able to use its instruments effectively in order to achieve its objectives.

This research work examined Effect of Fiscal and Monetary Policy Instruments on Economic Growth of Nigeria from 1985-2016. The study was anchored mainly on the quantity theory of money. The researcher used secondary data from the Central Bank of Nigeria (CBN) Statistical Bulletin from 1985-2016. The data collected were analyzed using descriptive statistics such as Mean, Standard Deviation and Skewness and the relationship between the variables of the model was tested using Autoregressive Distributed Lag Model (ARDL) regression analysis after the data was found to be stationary and integrated of different orders. The result of the ARDL regression analysis shows that monetary policy rate having a positive relationship with real gross domestic product is unexpected owing to its ultimate effect on prime lending rate which affects productive economic activities. Government recurrent expenditure was found to have positive significant relationship with economic growth. Accordingly, the long run relationship between monetary policy, fiscal policy instruments and economic growth in Nigeria points to the critical role of the monetary policy decision of the Central Bank of Nigeria and Federal Government fiscal policy programmes on growth and development of economy. This study concludes that monetary policy measured by monetary policy rate and the fiscal policies proxied by government recurrent expenditure have not significantly affected economic growth in Nigeria. It was recommended that the Central Bank of Nigeria should further develop the financial sector through making more funds available to the private sector by reducing monetary policy rate which affects interest rate ceiling on loans to the private sector. And that the Central Bank of Nigeria should further develop the financial sector through making more funds available to the private sector by reducing monetary policy rate which affects interest rate ceiling on loans to the private sector.

Fiscal and monetary policies are fundamental to ensuring macroeconomic stability. An overly expansionary fiscal approach can diminish the effectiveness of monetary controls. Crafting an optimal mix of fiscal and monetary strategies is therefore essential, particularly under country-specific economic conditions. This study investigates the impact of fiscal and monetary policy instruments on Pakistan’s economic stability using data from 1980 to 2024. The study employs the Vector Autoregressive (VAR) model, Impulse Response Functions (IRF) and Variance Decomposition (VDC) to analyze the relationships. Results show that money supply initially exerts a negative impact on GDP but turns positive in the medium to long run. Fiscal policy, however, demonstrates stronger and more consistent influence on economic growth. Thus, fiscal instruments appear to be more effective than monetary measures in the context of Pakistan.

Price Stabilization in the Nigerian Economy: An Assessment of the Role of Fiscal and Monetary Policy Instruments

Relevance of research topic. In the context of institutional reforms, the issue of the limited state financial resources for the implementation of the tasks and functions entrusted to them by state authorities and local self-government is being updated, which predetermines the development of a system of public debt management, which is a powerful instrument of macroeconomic policy. At the same time, the growth of the level of public debt in both developed and transformational economies is conditioned by a number of factors, the most important of which are: the formation of a budget deficit that is of a permanent nature; the need for public expenditures aimed at ensuring macroeconomic stability and accelerating the pace of economic growth, the development of the social sphere. Formulation of the problem. In the context of institutional reforms, the important task is to develop a debt strategy that will ensure the concentration of limited investment resources in those sectors of the economy that will accelerate the pace of economic growth, which requires further scientific research of the theoretical and applied aspects of the formation and implementation of budgetary and debt policies, their coherence, improvement the mechanism of public debt management. At the same time, the choice of tools for managing public debt can both negatively and positively affect macroeconomic stability in the country. Analysis of recent research and publications. The problem of public debt management is rather widespread in scientific research. These are works by well-known domestic and foreign scholars: J. Buchanan, U. Mitchell, J. M. Keynes, T. Bogolib, I. Zapatrina, L. Lisyak, I. Chugunov and others. Identification of unexplored parts of the general problem. The above issues are actualized in connection with the intensification of globalization processes, the adverse external and internal economic environment, which requires the solution of a number of specific tasks related to the formation of public debt at an economically sound level. Setting the task, the purpose of the study. The objectives of the study are: to reveal the role of the system of public debt management in the regulation of socio-economic processes, to justify the relationship between debt and budget policy; carry out an analysis and assessment of Ukraine's state debt; to identify the main factors influencing the level of public debt; to clarify the provision for improving the efficiency of the mechanism of public debt management. The purpose of the study is to substantiate the priority tasks of debt policy in the context of institutional transformations. Method or methodology of conducting research. The article uses a set of methods of scientific research: system approach, statistical analysis, structuring, analysis, synthesis, and others. Presentation of the main material (results of work). The role of public debt in state regulation of social and economic development of the country is determined. The analysis and evaluation of public debt has been carried out. The priority tasks of the debt policy in the context of institutional transformations are substantiated. The field of application of results. The results of this study can be applied in the process of formation and implementation of Ukraine's debt policy, reforming the system of public finances. Conclusions according to the article. Ensuring macroeconomic stability in the country involves the development of an effective strategy for managing the public debt, justifying the strategic priorities of debt policy, based on realistic forecast indicators of the country's economic development. The improvement of the mechanism for managing public debt should be based on a clear combination of legally defined budgetary and debt policy instruments. The use of indicators of a structured, cyclically-adjusted balance can increase the validity of fiscal and debt policies. The high level of government debt and significant budget deficits create risks for financial and macroeconomic stability, their potential negative impact on economic development is far more devastating than the pro-cyclical nature of fiscal policies that only affect the economic dynamics in the short term. Accordingly, the important task of fiscal policy is to prevent the growth of public debt and budget deficit while limiting the negative impact of further fiscal consolidation on aggregate demand. The article defines the strategic priorities of debt policy in the context of institutional transformations.

Effective management of Indonesia’s macroeconomic variables –production, inflation, money supply, aggregate demand, and interest rates– is crucial for economic stability and growth. This study examines the fiscal and monetary policies implemented by the Indonesian government from 2015 to 2019 and assesses their impact on key macroeconomic variables. Utilizing a qualitative research approach and comprehensive literature review, the study analyzes the principles and implementation of these policies. Fiscal policies, including infrastructure development, social protection, and tax amnesty, significantly contributed to economic growth and reduced unemployment. Monetary policies, such as interest rate adjustments, open market operations, and reserve requirements, maintained inflation around 3% and improved liquidity. However, economic growth fluctuated, indicating the need for better policy coordination. The study highlights the importance of strategic fiscal and monetary policies in achieving macroeconomic stability and offers insights into optimizing these tools for addressing economic challenges and promoting long-term development in Indonesia.Keywords: Indonesian government; macroeconomic management; fiscal policy; monetary policy; economic growth

Monetary coordination and macroeconomic stability are increasingly critical for domestic and fiscal policy in the aftermath of the global financial crisis. This research investigates the impact of monetary policy on financial and economic stability following the COVID-19 pandemic's economic lockdown. This article utilized a V.A.R. (Vector Autoregressive Models) estimator for time series data models. Quarterly statistics are gathered from the first quarter of 2004 to the first quarter of 2018. Using a V.A.R. model, the study investigates the causal connections between monetary policy instruments and economic stability. The findings suggest that Iraq's monetary policy is most efficient at maintaining a target growth rate for the money supply while simultaneously controlling inflation through an equalization cap (1.8 percent). Due to the rentier structure of the Iraqi economy, the money supply had a negligible influence. Monetary authorities must monetize oil earnings in order to finance public spending. Finally, an appropriate framework for monetary management must be created that ensures monetary independence and supremacy remain unimpaired. The findings give a thorough knowledge of the links between national monetary policies and economic stability, which can eventually aid in developing nations' formulation of good monetary and fiscal policies.

Energy and climate policies play an increasingly important role in the world in the era of climate change and rising energy prices. More often, the importance of the development of the energy sector and climate protection is seen from the point of view of the expenditures that will need to be absorbed in the economy, with the potential for increased energy prices. However, it should be remembered that this is also related to the issue of fuel poverty and the inability to meet basic energy needs by parts of society. The aim of the paper is to assess the importance of macroeconomic policy instruments in reducing fuel poverty, using Poland as an example. It will be examined whether and how the government influenced this phenomenon (directly or indirectly), through which instruments, and which instruments (fiscal, monetary or energy-climate policy) played the most important role in shaping the scale of fuel poverty in Poland, with an emphasis on the role of monetary and fiscal policy instruments. The analysis covered the period from 2004 to mid-2021. The results of the research showed that in Poland there is a lack of policy directly aimed at reducing fuel poverty, and the government affects the scale of fuel poverty indirectly mainly through macroeconomic policy instruments, i.e., fiscal and monetary policy instruments. The main and most effective instruments for reducing fuel poverty in Poland are social transfers. Other instruments that have a statistically significant impact on this poverty rate are the level of tax burdens and short-term interest rates. The analysis also revealed some opportunities for effective fuel poverty reduction policies. It was proven that in addition to fiscal policy, monetary policy, which would stimulate a decrease in short-term interest rates, is also an effective way to reduce the fuel poverty rate in Poland.

India is the second most populous country in the world and stood at seventh rank in a major climate risk index in 2019, which is a grave concern for the Indian government, policymakers and environmentalists. Therefore, the present study examines the role of fiscal policy and monetary policy instruments along with select macroeconomic variables on carbon emission in India over the period 1971–2019 in the non‐linear framework. The outcome of the study reveals that the impact of fiscal and monetary policy instruments on carbon emission is asymmetric in nature. In addition, the positive and negative shocks in fiscal and monetary policy instruments have a positive and negative impact on carbon emissions, respectively. Based on the coefficients’ magnitude, the role of fiscal policy instruments has a more prominent effect on carbon emissions than monetary policy instruments. The findings of the study imply that the Indian government is required to implement green fiscal and monetary policies. Use fiscal policy to implement a ‘green tax ratio’ and a ‘green subsidy programme’ for manufacturers and investors to reduce CO2 emissions. A ‘green lending programme’ should be introduced for commercial banks by implementing monetary policy via the central bank.

The complex interplay between monetary and fiscal policies is crucial for macroeconomic stability, especially in emerging economies like Algeria. Algeria's heavy reliance on oil revenue adds a unique layer of complexity, as global oil price fluctuations significantly impact government finances. This study investigates the relationship between the monetary base and government debt, a crucial aspect of understanding how fiscal and monetary policies interact in this context. Problem statement. This study aims to analyze the relationship between the monetary base (M1) and government debt in Algeria, examining how this nexus influences the effectiveness of both fiscal and monetary policies. Unresolved aspects of the problem. The unresolved issues in our work is the real dynamics between fiscal and monetary policies in the side of government debt management. Purpose of the article. By understanding this relationship, the study aims to provide valuable insights for policymakers regarding potential consequences of their decisions and the importance of coordination for achieving long-term macroeconomic stability. Presentation of the main material. The study employs a time-series econometric approach using the Autoregressive Distributed Lag (ARDL) model. This approach allows for the analysis of the long-term cointegration between the monetary base and government debt, using data from 1990 to 2024. The analysis also incorporates a simulation using MATLAB to visualize the relationship between the two variables over a 20-year horizon. Conclusions. The results of the ARDL analysis indicate a statistically significant negative relationship between lagged government debt and M1, suggesting that higher government debt levels in the previous period lead to a decrease in the monetary base in the current period. This finding suggests that Algeria's non-Ricardian fiscal policy, which relies on increasing public debt ratios to satisfy budgetary constraints, has a notable impact on the monetary base. The simulation results further illustrate the short-term effects of government debt on Algeria's monetary base, emphasizing the need for careful coordination between fiscal and monetary policies to ensure long-term macroeconomic stability.

The aim of the article is to explore the size and the structure of fiscal packages, implemented in response to the crisis caused by COVID-19, from the point of view of their impact on the security and stability of public finance. The first section provides an overview of the economic theory on the role of fiscal policy, including the causes of fiscal intervention. Next, difficulties in conducting fiscal policy under the conditions of pandemic are presented. In addition, fiscal instruments and their size are analysed in the context of their influence on budget results. In conclusion, it is claimed that fiscal packages should be temporary and targeted in order not to create a permanent burden on public finance, ensuring budget neutrality in the medium term. The empirical analysis expands the current knowledge on potential effects of fiscal policy implemented under the crisis conditions and low interest rates, when macroeconomic stabilisation can only be ensured through fiscal policy instruments, despite the accompanying fiscal costs related to the increase in public debt.