Abstract
This study investigates the effectiveness of monetary and fiscal policies in the US by employing cointegration and a quatrovariate Vector Error Correction Model together with Granger causality tests. Two models are estimated: (i) nominal national income, the ten-year government bond yield, and two policy variables, the federal government deficit and the federal funds rate; (ii) real national income, and the other same three variables. Monetary and fiscal policies are jointly ineffective in influencing nominal national income. However, monetary and fiscal policies are jointly effective in influencing real national income. In contrast to the first model, only monetary policy was found to be reactive to changes in real national income and the long-term interest rate. The asymmetric responses of the two policies to changes in real economic activity are attributed to the fact that monetary policy is much more efficient in promptly responding to changes in economic conditions than fiscal policy.
Highlights
Economists are interested in knowing how monetary and fiscal policies influence economic activity
Note that several proxies of nominal GDP and output were employed in the preliminary study All other proxies, either did not possess the required stability properties or were not cointegrated with the other variables of the Vector Error Correction Model (VECM). An exception to this policy occurred during the three year period of October 1979 to October 1982, a period during which the Federal Reserve System (Fed) tried to control unborrowed reserves in its effort to reduce inflation
Equation (12) of the estimated VECM model indicates that monetary and fiscal policies are jointly effective in influencing real national income lnrni in the long-run
Summary
Economists are interested in knowing how monetary and fiscal policies influence economic activity. Four Episodes of US Monetary Fiscal Policy Mix President Reagan’s administration adopted an expansionary fiscal policy during the first half of the 1980s; it pursued this policy by increasing spending and reducing taxes During this period, the Fed applied contractionary monetary policy by raising interest rates to curtail inflation. The consumer euphoria triggered by the monetary-fiscal policy mix, that led the US out of the 2002-2003 recession, is considered to be one of the main causes of the recent US mortgage financial crisis The rationale of this explanation is based on the fact that a very expansionary US policy-mix during this period created a bubble in the housing and stock markets which encouraged and triggered drastic increases in household indebtedness. It reduced the discount rate to .50 percent.
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call