Investigating the effects of fiscal and monetary policy on economic performance: Dynamic panel threshold regression analysis

Abstract

For ages, there are controversial debates from the different school of thoughts which focused on the behavior of economic experience incidents. In this paper, we carefully examine and compare the impacts of fiscal policy (government expenditure, current account balance, budget deficit and government debt) versus monetary policy (broad money and real interest rate) on economic growth using dynamic panel threshold regression of Hansen (2000). In particular, the main objectives include (1) to model the threshold effect of budget deficit in stimulating regime dependent switching of variables on economic growth and (2) to compare the impacts of both policies on economic growth between two groups of countries with current account deficit versus current account surplus. The study is based on a panel of two groups of countries for the period of 2005-2014. The results detected a first sample split threshold estimate and found that some of the variables have significance effect on economic growth regardless whether the budget deficit below or upper the threshold level. Comparing both groups of economies; we find one similarity, which both groups of economies show more effective in terms of monetary policy where broad money is able to stimulate higher growth but the fiscal policy through government spending fail to lead to higher GDP growth. Thus, it causes to lower growth in countries with current account deficit. Overall, we can conclude that current account balance has contributed to the large economic growth in countries with current account surplus while government spending has led to significant drop in the economic growth in countries with current account deficit, which indicate the failure or ineffectiveness of the fiscal policy.