Macroeconomic Stability and Optimal Policy Mix

Abstract

Public welfare and macroeconomic stability should be the main objectives of fiscal and monetary policy cooperation. Monetary and fiscal policy should be coordinated better to maintain sustainable economic development. To implement fiscal measures and monetary controls, a balanced budget is necessary. This study uses data from 1976 to 2022. A macroeconomic stability check uses real GDP, current account balance, exports, real effective exchange rate, broad money (M2), foreign exchange reserves, consumer price index (CPI), nominal exchange rate, government expenditures, and government tax revenue. The VAR models we use are Impulse Response Functions (IRFs) and Variance Decompositions (VDs). CMR feels a negative impact, TRY, whereas M2G, GY, and others feel a positive impact. Achieving output and price stability requires higher call money rates, more tax revenues, and reduced government spending. Output gaps should be negative.M2G and CABY are negatively correlated, whereas CABY and CMR are positively correlated. If there is a negative output gap, monetary aggregates and taxes conflict with price and production stability; however, policy should aim to increase the current account balance. We recommend strict fiscal and monetary policy measures to stabilize output and limit inflation whenever there is a positive output gap. In addition to strengthening trade and foreign exchange reserves, reduced government spending will stabilize exchange rates; however, increasing tax revenue will counteract these benefits by strengthening the current account.