The Impact of Fiscal and Monetary Policy on Economic Growth in Southern African Custom Union (SACU) Member Economies between 1980 and 2017: A Panel ARDL Approach

Abstract

This study seeks to investigate the impact of fiscal and monetary policy on economic growth in Southern African Custom Union (SACU) member economies between 1980 and 2017. Government expenditure and revenue were used as the proxy variables for the fiscal policy whereas real interest rate, inflation, official exchange rate and M2 money supply were used as the proxy variables for monetary policy. Using Lin, Levin and Chu (LLC), and Im, Peresan and Shin (IPS) unit root tests, it was found that all variables were stationary at level except for M2 money supply which was found to be stationary after first difference. Due to this, Panel Auto Regression Distributed Lags (PARDL) estimation technique was utilized in this study. On the basis that the number of variables under study (eight, including the dependent variable) are greater than the number of SACU participants (five economies), and some common characteristics on both fiscal and monetary policy revealed by this study, Pooled Mean Group (PMG) PARDL model estimator was used in this study. The results indicate that fiscal and monetary policy influence economic growth significantly across SACU member economies in the long run. However, fiscal policy is only significant if government expenditure is used as the functional policy instrument rather than government revenue. In the short run, the effects of these two macroeconomic policies on economic growth are mixed. In determining the direction of the long run relationship, Granger causality results indicate that the direction is from government expenditure, real interest rate, inflation and official exchange rate to economic growth. These causality links are uni-directional in nature. Lastly, the results also indicate that private investment is crowded out in the long run because of significant high levels of government expenditure in the long run across SACU member economies. In the short run, private investment is crowded out because of significant high level of government expenditure only in Swaziland.