Monetary Policy Mix Research Articles

THE EFFECT OF FISCAL POLICY ON THE RELATIONSHIP BETWEEN MONETARY POLICY AND MACROECONOMIC VARIABLES IN NIGERIA

This study examined the effect of fiscal policy on the relationship between monetary policy and macroeconomic variables in Nigeria: An Empirical Investigation. The study employed a two-stage least square technique as estimation technique, where in the first step; the empirical models of fiscal and monetary policies were separately estimated. In the second step, the dependencies of each policy on the other are then included, to capture the effects of each on the other. Annual time series on the various monetary policy and fiscal policy variables from 1981 to 2020 were obtained from the Central Bank of Nigeria statistical bulletin. Augmented Dickey Fuller (ADF) test was used to examine the stochastic properties of the series. The findings revealed that Gross Domestic Product (GDP), inflation, and money supply are negatively related to monetary policy rate in Nigeria. Also, government expenditure limits the effectiveness of monetary policy in the management of both economic growth and inflation in Nigeria as the effect on inflation reduces from 0.06 to 0.02 and the effect on GDP changes from negative to positive. The study recommended that there should be an establishment of better consultation between both policies in order to secure high and sustainable fiscal and monetary policy mix and hence economic growth with price stability.

Identifying efficient policy mix under different targeting regimes: A tale of two crises

We examine the influence of demand shock, supply shock and the monetary policy shock on macroeconomic variables using the New Keynesian Dynamic Stochastic General Equilibrium framework. Our study tries to identify the efficient monetary policy mix as an antidote to the prevailing economic fragilities that originated due to the COVID-19 pandemic and geopolitical conflict in case of India and China. Under both simulated and Bayesian analysis, our findings revealed the inflationary effect of demand and supply shock with a target-oriented monetary policy under sticky prices as the efficient policy tool to counter these effects. The macroeconomic projections depicted the favourable influence of output due to active intervention of target-oriented monetary policy in both these economies.

Impact of COVID‐19 pandemic on financial health and food security in Nigeria: A survey‐based analysis

This study investigates the impact of COVID‐19 pandemic on the health, food security and financial lives of Nigerian households. The data for the study were collected from 813 households from the six geo‐political zones in Nigeria using a questionnaire and the results were analysed using descriptive statistics and andordinal logistic regression model. The ordinal regression model is appropriate for regression results with ordinal scales as the dependent variable. The findings reveal that the COVID‐19 pandemic has affected households' personal savings significantly. The majority of the households' healthcare financing is borne out of their personal income and savings in the absence of a health insurance scheme. Households experiencing worsening financial status largely did not have food during the pandemic. Many households have a positive expectation that they will recover from the unfavourable financial condition they are currently experiencing and there is a strong traditional support system existing in the localities during the study period. Furthermore, food insecurity during the pandemic was significantly occasioned by an increase in prices, a fall in income, adverse financial well‐being and insufficient welfare benefit provisions. The study recommends, amongst others, the need to urgently enhance the economic and financial well‐being of the Nigerian populace to guide against the devastating impact of the COVID‐19 pandemic on food security in Nigerian households.This can be achieved through robust fiscal and monetary policy mix in ensuring sustained development trajectory.

Fiscal multipliers and structural economic characteristics: Evidence from countries in sub‐Saharan Africa

AbstractOutput response to discretionary fiscal policy is a key aspect of examining various theories, findings of empirical studies and delivering guidance to policymakers. This study analyses the output response to unanticipated fiscal spending shocks under several structural economic characteristic factors, including business cycle states, debt burden, openness of the economy, exchange rate regimes and political governance regime, using annual data from 40 countries in SSA spanning from 2000 to 2019 in a panel threshold vector auto‐regression model. The findings indicate that fiscal spending multipliers have much larger effects on output in times of recession, in economies operating under lower trade openness, a fixed exchange rate, low‐debt burden, restricted capital mobility, less financial development and a democratic governance regime. Based on the results, the discretionary countercyclical fiscal policy and optimal fiscal policy action are recommended. Moreover, in order to have effective fiscal policy must target hand‐to‐mouth consumers (non‐Ricardian consumers) and firms with limited liquidity, concentrating on social services and social protection to increase short‐term demand. Likewise, A proper fiscal monetary policy mix should be considered with other structural measures to maximising the positive effects of the fiscal expansion.

Hungary

While the economy was recovering from the COVID-crisis, a succession of shocks and loose fiscal policy intensified inflation and fueled a large external deficit. Appropriately, the central bank significantly tightened monetary policy and the government plans a large fiscal adjustment. However, regulatory measures undermine the tighter fiscal and monetary policy mix. Growth is expected to slow sharply with still-elevated inflation and sizable risks can worsen the outlook.

The Role of Institution and Macroeconomic Policy Mix on Economic Growth in Muslim Country

This study examines the role of the fiscal and monetary policy mix on economic growth with the St. model. Louis, which Andersen and Jordan developed in 1968, included the variable quality of institutions (governance) as a moderator. This research model uses the independent variable in the form of money supply (M) as a proxy for monetary policy and government expenditure (G) and government debt (D) as a proxy for fiscal policy. The governance index variable (INS) consists of 6 indicators, namely 1). Voice and Accountability; 2). Political Stability and Absence of Violence/Terrorism; 3). Government Effectiveness; 4). Regulatory Quality; 5). Rule of Law; 6). Control of Corruption. The objects of this research are all member countries of the Organization of the Islamic Conference (OIC), 57 countries. Due to the limited data that can be accessed, 46 countries were selected as research samples with a research period of 2005-2018. The analytical tool used in this study is a moderating panel data regression consisting of 28 equations. This study indicates that fiscal policy (government expenditure) and monetary policy (money supply) have a significant effect on economic growth. The government debt has a negative effect on economic growth in OIC countries. The quality of governance has a positive effect on economic growth in the OIC countries. This shows the important role of the quality of governance in the economy, as in the latest economic growth theory. The quality of governance cannot moderate the effect of the fiscal and monetary policy mix on economic growth in the OIC countries. The governance index plays a more direct role in economic growth, not as an effective moderator for government economic policies. The governance index is more effective in moderating various economic variables, which are private economic activities.

Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy

This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional im-pacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the “one size fits all” monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.

Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy

This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional im-pacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the “one size fits all” monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.

Optimal Monetary Policy Mix at the Zero Lower Bound

Long-term asset purchases carried out by central banks increase the consumption volatility of households holding long-term debt. For this reason, monetary authorities should not just aim at stabilising inflation and the output gap but also mitigate the volatility of their balance sheet. In response to negative demand shocks at the zero lower bound (ZLB), the optimal monetary policy consists of a mix of forward guidance and mild adjustments in the balance sheet. The presence of balance-sheet policies reduces the optimal ZLB duration and significantly improves social welfare. Mitigating the effectiveness of forward guidance calls for a more substantial balance-sheet expansion and a shorter ZLB duration. If a central bank only aims to stabilise inflation and the output gap, welfare losses are significantly larger than under the optimal policy and balance-sheet policies only improve welfare if the weight on output-gap stabilisation is relatively large. Last, simple implementable policy rules can achieve welfare outcomes close to those under the optimal policy.

Optimal Monetary Policy Mix at the Zero Lower Bound

Optimal Monetary Policy Mix at the Zero Lower Bound

The fiscal–monetary policy mix in the euro area: challenges at the zero lower bound

SUMMARY This paper explores the reasons for the suboptimal fiscal–monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policy and of economic outcomes in the euro area, the United States and Japan suggests that both fiscal and monetary policies in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. Monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the ‘safe asset’ status of euro area sovereign debt during the crisis complicated fiscal and monetary policies. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal–policy mix and longer-term prospects for the euro area.

Inflation, Oil Revenue, and Monetary Policy Mix in an Oil-Dependent Economy: Empirical Insights from the Case of Nigeria

Inflation, Oil Revenue, and Monetary Policy Mix in an Oil-Dependent Economy: Empirical Insights from the Case of Nigeria

GHG Emissions Control and Monetary Policy

This paper examines the optimal environmental and monetary policy mix in a New Keynesian model embodying pollutant emissions, abatement technology and environmental damage. The optimal response of the economy to productivity shocks is shown to depend crucially on the instruments policy makers have available, the intensity of the distortions they have to address (i.e. imperfect competition, costly price adjustment and negative environmental externality) and the way they interact.

A sectoral analysis of fiscal and monetary actions in Nigeria

There is a unanimity among economists that fiscal and monetary actions are either individually or jointly affecting economic activities. However, the impacts of fiscal and monetary actions differs from country to country and from sector to sector. While there are a few studies which have examined the relative potency of monetary and fiscal policies in the Nigerian economy, no study has delved into the sectoral impacts of monetary and fiscal policies. Our approach is similar to the St. Louis equation based studies, in the sense that money supply and government spending are our explanatory variables. That is, we contribute to this literature with a different approach and infer the effect of fiscal and monetary policies on the sectors of the Nigerian economy. Using the VAR technique, therefore, we investigate whether government expenditure and money supply have impacts on the five sectors of the economy: agriculture, building, services, industry and wholesale. Using sectoral GDP rather than the national GDP has the advantage of a more direct measure of the usefulness of fiscal and monetary policy mix to the subunits of the economy. Compared to the other St. Louis equation based studies, our approach has the advantage that the VAR estimates are more narrowly focused on the sectors of the economy. The study shows that the elasticity of sectoral output with respect to monetary actions are significant for only three sectors of the Nigerian economy: agriculture, services and wholesale, though the significance differs from sector to sector, subject to the strength and the configurations of the institutional factors in each sector. Fiscal actions have no significant impact on any of the sectors. The proper response is not to try to reverse monetary and fiscal actions, which has conferred some benefits overall. Rather, the Nigerian government must continue to work with the financial institutions to advance financial practices and reinforce financial regulation, as well as macro-prudential oversight. The ultimate goal should be to consistently re-drive monetary and fiscal actions in ways that are both productive and conducive to sectoral growth in Nigeria.

Assessing the Monetary Policy Stance in Turkey Using the Natural Interest Rate

This study assesses the monetary policy stance in Turkey using the natural interest rate. In doing so, the study utilizes an empirical framework that estimates the natural interest rate as an unobserved stochastic variable using a parsimonious new Keynesian model consisting of a Phillips curve, an IS curve and a backward-looking Taylor-type interest rate rule. In addition, the model includes stochastic laws of motion for natural interest rate and potential output. Given the dynamic nature of the Turkish economy, the parameters are assumed to be time-varying. This introduces nonlinearity to the system, which can be handled by the Extended Kalman Filter (EKF) algorithm. The analysis results suggest that the estimated natural interest rate is informative about the monetary policy stance. This is especially true after 2010, which is marked by the CBRT’s (Central Bank of the Republic of Turkey) adoption of the new monetary policy mix. The study also addresses the zero lower bound issue, which has dominated the advanced economies after the global crisis. But most importantly, this study underlines the need to find an accurate measure for assessing the monetary policy stance to meet the challenges induced by the post-crisis period.

The Fiscal-Monetary Policy Mix and Exchange Rate Stability: A Dynamic Stochastic General Equilibrium Model With Chinese Characteristics

ABSTRACTWe develop a small open economy model and compare alternative fiscal-monetary policy mixes using data for China. We show that the trade-offs faced by policy makers involve not only the stabilization of output, inflation, and real exchange rates, but also government debt stability. The source of shocks has important implications for the trade-offs. In the face of external shocks to interest rates or inflation, a passive fiscal and active monetary policy mix performs well in stabilizing government liabilities, inflation, and real exchange rates but generates higher output volatility. An active fiscal and active monetary policy mix is much more stabilizing in response to internal shocks to government expenditures or sector-specific productivity.

Coordination between the monetary and public debt management policies in Croatia

This paper explains the main characteristics of and prerequisites for coordination between the measures and instruments of monetary and public debt management policies in Croatia and evaluates current practice, particularly over the last two recession years. Attention is drawn to the importance of coordination for achieving macroeconomic stability and to the main problems and challenges obstructing successful coordination. It is assessed that the Croatian National Bank (CNB), with its measures and instruments, has consistently contributed to improving coordination with the public debt management policy, despite the narrowing of its room for manoeuvre due to a complex economic environment and the specific functioning of the transmission mechanism of monetary policy. Notwithstanding some contribution to coordination made by the Government and Ministry of Finance, they must take measures and employ instruments to make more significant adjustments and, together with the CNB, define an optimum fiscal and monetary policy mix for the future that will ensure stable economic growth. This paper gives an overview of major CNB measures aimed at facilitating the public debt management and improving coordination with the Ministry of Finance, and presents a detailed analysis of open market operations. It also points to a certain contribution of the Ministry of Finance to the coordination improvement, indicating major barriers to effective coordination between these important policies.

A welfare perspective on the fiscal–monetary policy mix: The role of alternative fiscal instruments

Abstract The need of fiscal consolidation is likely to dominate the policy agenda in the next decade; starting from statistical evidence on the conduct of fiscal policy in the EMU area over the last decade, this paper addresses the optimality of alternative fiscal consolidation strategies. In this paper, we explore the welfare properties of debt-targeting fiscal policy implemented through, alternatively, distortionary taxation on consumption, labour and capital income or productive and wasteful government expenditure. We build a general equilibrium model with various distortions in order to evaluate the welfare ranking of alternative fiscal policy configurations under different monetary policy regimes. Our results show the welfare superiority of fiscal adjustments based on productive government expenditure, whereas the use of a capital income tax rate as fiscal instruments yields the highest welfare loss.

A Monetary Policy Rule for Jamaica

Since 1996, the Bank of Jamaica (BoJ) has sought to limit changes in the exchange rate for the Jamaican dollar in the context of its efforts to maintain low inflation. However, with a persistently high public sector deficit, real interest rates have remained generally high, which partly explains the slow pace of growth. This paper discusses an alternative monetary policy mix for achieving low variance for inflation and output through the prism of an empirical macroeconomic model. The simulation results suggest that a monetary policy mix that takes into account the impact of policy on both inflation and output achieves lower variance for inflation and output compared with the current policy mix, which tilts somewhat toward exchange rate stabilization. A case, therefore, can be made for the BoJ to move to a soft inflation targeting regime supported by fiscal consolidation.

Monetary Divergence

Under capital mobility, governments face a political choice: hold an autonomous monetary policy with currency instability or stabilize exchange rates with the sacrifice of policy autonomy. This article examines what domestic political factors led the advanced industrial democracies to choose an autonomous monetary policy and what factors led them instead to choose stable exchange rates in the post-Bretton Woods era. Leftist-led governments have opted for an autonomous loose fiscal-tight monetary policy mix associated with exchange rate instability. Rightist-led governments have chosen a tight fiscal-loose monetary policy mix associated with exchange rate stability. These results are important because they help reestablish partisan agency in terms of monetary-exchange rate policy making, even under the structural constraint of international capital mobility.