Monetary Policy and Debt Deflation: Some Computational Experiments

This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Bulgaria, Croatia and Macedonia. We employ recursive vector autoregressions in order to study the linkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicators, inflation rate and output gap. We obtain the following main results: first, domestic economic activity exerts significant effects on inflation, provoking a strong reaction of monetary policy, especially in case of procyclical or erratic behavior of fiscal policy; second, we find evidence for the expansionary effects of fiscal consolidation since fiscal tightening leads to an increase in economic activity; third, the effects of monetary policy on output and inflation are generally as expected; fourth, monetary policy acts as a strategic substitute to tight fiscal policy, while in case of monetary tightening, fiscal authorities behave in a countercyclical manner.

Purpose The main purpose of this study is to see the macroeconomic effects of monetary and fiscal policy shocks in South Africa. Design/methodology/approach The joint effects of monetary and fiscal policy are analyzed by applying short-run contemporaneous restrictions for the identification of shocks in an SVAR in order to derive impulse response functions. Hence, a general AB model of (Amisano and Giannini, 1997) identification scheme, which is not recursive, is employed in this study. Findings The author shows that monetary tightening leads to a fall in real economic activity and depreciates the exchange rate. And in regard to the fiscal policy, the author calculates an initial government spending multiplier of 0.20, which later peaks at 0.40. The tax multiplier is almost 0 on impact and statistically insignificant. However, the author finds evidence supporting the existence of accommodative stance between monetary policy and fiscal policy, which is important for economic and political decision-making. Originality/value Empirical studies that deal with the joint effects of monetary and fiscal policy for South Africa through the SVAR framework are quite limited. This paper, therefore, contributes to the empirical literature on the effects of monetary and fiscal policy in a small open economy like South Africa.

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INTERRELATIONSHIP OF INFLATION, EXCHANGE RATE AND INTEREST RATES IN THE CONTEXT OF HUNGARY'S STRATEGIC POLICY

The article analyzes the effectiveness of the NBU's monetary policy. During the period of independence, the National Bank never performed any of the functions stipulated by law. The main instruments of monetary and credit policy at the disposal of the central bank are not used as intended, and therefore do not ensure the performance of the functions entrusted to the National Bank of Ukraine, in particular: they do not ensure the stability of the hryvnia exchange rate, price stability, accelerated socio-economic development of the state and the adopted inflation level. The monetary and credit policy of the National Bank must be radically changed to ensure the implementation provisions of Art. 6 of the Law of Ukraine ‘On the National Bank of Ukraine'. The central bank's efforts must be coordinated with the government's efforts, and the central bank's monetary policy must be coordinated with the government's fiscal policy. In the paper, we propose to change the monetary policy instruments of the NBU in order to direct it to the support of the real sector of the economy and the stability of the exchange rate. The proposed changes provide for the establishment of refinancing rates up to 2%, placement of deposit certificates -2% (minus 2%). At the same time, it is necessary to make changes to the Tax Code of Ukraine regarding the introduction of progressive floating rates of taxation of the profit of financial institutions, limitation of the right to deduct losses from the tax base of financial institutions in certain cases. . . For the actual production of goods with a high added value, provide the reduction of the tax base for the part invested in production, and set the tax rate for the distributed part of the profit at the level of the personal income tax rate. Non- traditional methods of stimulating development are also proposed, in particular the purchase of government securities. The marginal value of government debt securities should be limited to 2-3% of GDP.

Neste trabalho, formula-se um modelo macroeconômico de curto prazo a fim de se derivar as interações entre os setores agrícola e não-agrícola por ocasião da aplicação de políticas de estabilização. As variáveis exógenas são mudanças nas políticas fiscal, monetária e cambial e nos preços internacionais. As variáveis endógenas explicitamente analisadas são renda real para cada setor e preços relativos. Os principais resultados são: (a) os preços relativos tendem a variar quando as variáveis exógenas variam; (b) a produção agrícola e os preços relativos da gricultura tendem a se reduzir face a políticas fiscais e monetárias expansivas mesmo quando a elasticidade-renda de demanda para produtos agrícolas for zero; (c) embora o efeito inflacionario de políticas monetárias e fiscais expansivas seja maior quando a elasticidade de oferta de produtos agrícolas é baixa, os preços nominais da agricultura tendem a crescer no máximo tanto quanto os preços nominais não-agrícolas. Os efeitos de diversas pressuposições a respeito da elasticidades de demanda e de oferta sobre os resultados do modelo são também derivados.

The aim of this paper is to analyze empirically the interaction between monetary and fiscal policy in a small open transition economies: the case the Republic of Macedonia. This paper employs SVAR methodology to examine jointly the impact monetary and fiscal policy on real GDP and prices. The result reveals that the monetary policy counteracts the effects of fiscal policy and persists until the effects of fiscal policy changes disappear. This causes a crowding out effect. In addition, the result shows that the best fiscal policy for stimulating the economy appears to be one of tax-cuts. The empirical research, in jointly analyzing fiscal and monetary policy also provides an additional, possibly interesting result. The sizes of the responses of real GDP and prices to monetary shock are not significantly reduced when fiscal shock is included into monetary SVAR.

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.

Financial frictions and financial shocks can affect the trade-off between inflation stabilization and output-gap stabilization faced by a central bank.Financial frictions lead to a greater response in output following any deviation of inflation from target and thus lead to an increase in the sacrifice ratio.As a result, optimal monetary policy in the face of credit frictions is to allow greater output gap instability in return for greater inflation stability.Such a shift in optimal monetary policy can be mimicked in a Taylor-type interest rate feedback rule that shifts weight to inflation and the lagged interest rate and away from output.However, the ability of the conventional Taylor rule to mimic optimal policy gets worse as credit market frictions and shocks intensify.By including a financial variable like the lending spread in the monetary policy rule, the central bank can partially reverse this worsening output-inflation trade-off brought about by financial frictions and partially undo the effects of credit market frictions and shocks.Thus the central bank may want to include lending spreads in the policy rule even when financial distortions are not explicitly part of the central bank's objective function.

An Analysis of the Relative Effectiveness of Monetary and Fiscal Policies on Economic Performance in Five CARICOM Member States: Barbados, Belize, Guyana, Jamaica and Trinidad and Tobago

The object of research is the processes of fiscal and monetary regulation, as well as the results of their impact on the economy of Ukraine. One of the most problematic areas is the unbalanced interaction of fiscal and monetary policy, which negatively affects the efficiency of the allocation of financial resources and increases the risks of government debt. In the course of the research, methods of systemic, theoretical generalization, analysis, comparative comparison and graphical presentation of results are used, which allow the author to prove the absence of a positive synergetic effect of monetary and fiscal policy. This is determined by the unsuccessful attempts of the National Bank of Ukraine to apply inflation targeting and the critical state of Ukraine's public debt. The presence of serious problems in the financial system of Ukraine is characterized by a constant trend in the growth of public debt in 2016–2017. State and government-guaranteed debt of Ukraine in September 2017 amounted to 82 % of GDP, which accounts for 5 % of GDP. This is due to an increase in the Government's expenses for servicing its own debt obligations through domestic borrowing through issuance of domestic government loan bonds in the amount of 15.27 billion UAH for the period 2014 – 9 months of 2017. The peculiarity of the policy of public debt management in Ukraine is determined by the use of the resources of the banking system to lend to the government. This situation causes the processes of escalating quasi-fiscal operations leading to quasi-monetization, distortion of the values of economic indicators, the predicted level and effectiveness of monetary instruments of inflation targeting. Based on empirical generalizations, directions for implementing coordinated interaction of fiscal and monetary instruments are identified. This is achieved through economic activation of the stimulating role of fiscal policy, stimulation of economic growth on the part of demand, and an increase in the efficiency of using external borrowed funds. The implementation of a system of measures in the spheres of monetary circulation and credit will help to stimulate inflation, employment and equalization of the balance of payments. Advantages of the operational management of the debt of all sectors of the economy are ensuring the lack of a budget, as a prerequisite for Ukraine's stable economic development.

Inflation, a persistent economic challenge in Nigeria, erodes purchasing power, distorts investment decisions, and exacerbates inequality. This research estimates the interaction effects of fiscal and monetary policies on inflation, focusing on the coordination challenges between these policy frameworks. Using an ARDL model, the research incorporates key variables such as real GDP, total government expenditure, money supply, fiscal deficits and others. The findings reveal that interest rate and money supply significantly influence inflation, highlighting the dominant role of monetary policy. Conversely, fiscal spending shows no direct long-run impact on inflation, while fiscal deficits contribute to inflationary pressures. The coefficient of interaction between monetary and fiscal policies demonstrates a modest stabilizing effect, underscoring the need for coordinated policy efforts. The study identifies a lack of synchronization between fiscal and monetary policies as a critical factor exacerbating inflation volatility. Structural issues, such as exchange rate instability and the informal economy, further complicate inflation management. Recommendations include prioritizing money supply control, fostering fiscal-monetary coordination, and addressing the structural factors underlying inflation. This research provides actionable insights for policymakers to design sustainable strategies aimed at achieving macroeconomic stability and controlling inflation in Nigeria.

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-style: normal; mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">Can expansionary fiscal or monetary policy stimulate the U.S. economy in light of recent events?<span style="mso-spacerun: yes;">  </span>Using an Error-Correction-Vectorautoregression, we examine the relative effectiveness of both types of governmental stabilization policy. Unlike previous studies, we use a more general error correction vectorautoregression (ECM) approach.<span style="mso-spacerun: yes;">  </span>Our focus is on determining the relative explanatory power of measures of monetary policy (M2 and the Federal Funds Rate) and fiscal policy (marginal income tax rates and government spending) in explaining movements in consumption, investment, and output.<span style="mso-spacerun: yes;">  </span>Results suggest that monetary policy is relatively more powerful than fiscal policy. </span></span></span></p>

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT REQUEST OF AUTHOR.] The 2007-2009 economic events have renewed interests in the relationship between the financial sector and the macroeconomy and suggested that shocks originated in the financial sector may be a potential source of business cycle fluctuations. In this regard, this dissertation focuses on quantifying and assessing the role of shocks originated from the financial sector in driving business cycle fluctuations and how monetary policy could possibly respond from a welfare prospective. The dissertation consists of three chapters. The first chapter attempts to model the relationship between the financial sector and the macroeconomy theoretically. Specifically, I build a dynamic stochastic general equilibrium (DSGE) model by incorporating a financial sector with frictions between investors and banks. The existence of such frictions affect the healthiness of the financial sector and increase its riskiness, whereas would not affect those of the non-financial sector by much. I regard this type of frictions as supply-side financial shocks that are originated in the financial sector. Under this framework, the external finance premium in the financial sector can be determined endogenously. To study how the financial shocks would affect the dynamics of the model, impulse responses are used to show that the inclusion of those financial shocks yield larger amplification effects. Thus the model is able to generate higher volatility in aggregate outcomes, especially in the financial sector. This provides theoretical grounds to study the role of supply-side financial shocks for the next two chapters. Chapter two seeks to quantify empirically the effects of the financial shocks on the macroeconomy in a structural vector autoregression (SVAR) model. Based on the model implications derived from Chapter one, two types of financial shocks can be discriminated|the demand-side financial shock that comes from the entrepreneurial sector and the supply-side financial shock that comes from the financial sector. The identification strategy is that these two types of shocks affect the standards deviation of the equity returns in financial and entrepreneurial sectors in opposite directions. The overall SVAR results show that the effects of financial shocks on the real economic activities are non-trivial, although not major. In particular, the supply-side financial shocks originating from the financial sector explain a non-negligible part of the variabilities for the key macro variables; whereas for the financial variables, they are the main drivers, especially during the 2007-2009 crisis period. Chapter three studies how monetary policy should respond to this type of supplyside financial shocks from a prospective of social welfare. In particular, I consider a Taylor-type monetary policy rule augmented with a financial variable|the external finance premium. By doing so, it allows the central bank to react to the changes in the riskiness of the financial sector, in addition to the conventional output and inflation targets. The welfare results show that it is optimal for the central bank to respond to the financial variable. In other words, when there are shocks originated in the financial sector, the riskiness of the financial sector increases, and so do the external financing costs and the external finance premium in the financial sector. The banks' balance sheet conditions worsen and the central bank should cut its policy rate. The welfare analysis also implies that the inflation stabilization is still the most important target of the central bank, which in line with the literature that emphasizes the importance of inflation targeting.

Growing climate change concern invites policy responses from all corners. Governments and central banks in emerging market economies pose interests in environmental urgencies. This paper reexamines fiscal and monetary policies’ effects on environmental quality in five large emerging economies (Brazil, Russia, India, China, and South Africa) from 1990 to 2018. Effects of population, economic growth, and technology on CO2 emissions are also estimated. According to the Pooled Mean Group-Autoregressive Distributed Lag estimations, Panel Fully Modified Ordinary Least Squares, and Driscoll-Kraay estimations, expansionary fiscal and monetary policies significantly improve environmental quality. Technology also promotes environmental quality. However, economic and population growth degrade the natural environment in the long run. The paper also discusses potential policy implications.