| Peer-Reviewed

Monetary and Fiscal Policy Shocks and Economic Growth in Kenya: VAR Econometric Approach

Received: 31 October 2014     Accepted: 19 November 2014     Published: 25 November 2014
Views:       Downloads:
Abstract

In macroeconomic policy design and management, monetary and fiscal policies are of great essence. However, the relative effectiveness of these policies has been subject to debate in both theoretical and practical realms for a long period of time. This paper investigated the relative potency of the policies in altering real output in Kenya using a recursive vector autoregressive (VAR) framework. The analysis of variance decomposition and impulse response functions reveled that fiscal policy has a significant positive impact on real output growth in Kenya while monetary policy shocks are completely insignificant with fiscal policy shock significantly alters the real output for a period of almost eight quarters.

Published in Journal of World Economic Research (Volume 3, Issue 6)
DOI 10.11648/j.jwer.20140306.14
Page(s) 95-108
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Monetary Policy, Fiscal Policy, Vector Autoregressive Model, Real Output, Policy Design

References
[1] Abbas, K. 1991. Causality test between money and income: a case study of selected developing Asian countries (1960-1988). Pakistan Development Review, 30(4), 1919-
[2] Ansari, M.I. Monetary vs. Fiscal Policy: Some Evidence from Vector Auto regressions for India Journal of Asian Economics, (winter), 1996, 677-687.
[3] Adefeso, H.A. and H.I. Mobolaji,. 2010. The fiscal-monetary policy and economic growth in Nigeria: Further evidence .Pakistan journals of social sciences,7(2):137- 142
[4] Ajayi, F. 1974. Monetary policy and Bank performance in Nigeria. A two steps co integration approach.
[5] Ajisafe, R.A. and B.A. Folorunso, 2002. The relative effectiveness of fiscal and monetary policy in macroeconomic management in Nigeria. Africa Economic and Business review, Vol. 3: 23-40.
[6] Arestis. P., 2009. Fiscal policy within the new consensus macroeconomics framework. Cambridge Centre for economic and Public Policy, http://www.scribd.com/doc/84653582/Fiscal-Policy-Within-the-New-Consensus-Macroeconomics-Framework.
[7] Blanchard, O. and R. Perotti, 2002. An empirical characterisation of the dynamic effects of change in government spending and taxes on output. Q. J. Economics., 117: 1329-1368
[8] Bruce, D. and C.S. Tricia, 2004. Empirical comparison of the effectiveness of fiscal and monetary policy. Centre for Business and Economic Research,
[9] Cheng, K.C., 2006. A VAR analysis of Kenya’s monetary policy transmission mechanism: How does Central Bank repo rate affect the economy. IMF Working Paper
[10] Chowdry, R. and Walid, 1995. Monetary policy, output and inflation in Bangladesh. A dynamic analysis: Applied Economics Letters, 2: 51-55
[11] Chowdhury, A.R. 1986. Monetary and Fiscal Impacts on Economic Activities in Bangladesh A Note. The Bangladesh Development Studies, 14(.2):101-106.
[12] Corsetti, G. and A. Meier, 2011. Fiscal policy transmission with spending reversals. IMF working paper 09106, CEPR DP 7302, http://www.eui.eu/Personal/Researchers/meier/reversals_feb2011.pdf.
[13] Darrat, A.F., 1984. The Dominant Influence on Fiscal Actions in Developing Countries. Eastern Economic Journal, 10(3):271-284.
[14] Dungey, M. and Fry, R. 2007. The identification of fiscal and monetary policy in a structural VAR. Cambridge University Paper,
[15] Elliot, J.W., 1975. The influence of monetary and fiscal actions on total spending: the st. Louis total spending equation revisited. J. Money Credit Banking, 7: 181-192.
[16] Engle, R. F. and Granger, C. W .J. 1987. Co-integration and Error Correction: Representation, Estimation and Testing. Econometrica, Vol., (55).
[17] Francisco, C and Pablo, H. 2006.The economic effects of fiscal policy shocks in Spain. A structural VAR approach. European central Bank Working paper series, No 647
[18] Friedman, M. and D. Meiselman,1963. The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958, Stabilization Policies: A Series of Research Studies Prepared for the Commission on Money and Credit, Brown, E.C. and Commission on Money and Credit, (Eds.).. 1963, pp. 165 -268
[19] Garrison, C.B. and F.Y. Lee, 1995. The Effect of macroeconomic variables on economic growth rates: A cross-country study. J. Macroeconomics, 17: 303-317.
[20] Gramlich, E.M., 1971. The usefulness of monetary and fiscal policy as discretionary stabilization tools. J. Money Credit Banking,3: 506-532.
[21] Hussain, M. 1982.The Relative Effectiveness of Monetary and Fiscal Policy: An Econometric Case Study of Pakistan. Pakistan Economic and Social Review. 20: 159-181
[22] Hicks, J.R., 1937. Mr. Keynes and the classics: A suggested interpretation. Econometrica, 5: 147-159
[23] Hsing, Y. and W.J. Hsieh, 2004. Impact of monetary, fiscal and exchange rate policies on output in China:VAR approach. Econ. Planning, 37: 125-139.
[24] Jacop, C. and H. Sebastian, 2011. Identifying the effects of government spending shocks with and without expected reversal. European central Bank.
[25] Jordan, Roland and Carter (1999). The potency of monetary and fiscal policies in Caribbean countries: A co integrating VAR approach. Research department Central Bank of Barbados.
[26] Jayaraman, T.K., 2002. Efficacy of fiscal and monetary policies in the South pacific Island Countries: some empirical evidence. Ind. Economic. J., 49: 63-72.
[27] Khamfula, Y. 2008. Output growth and monetary policy interaction in monetary area, Forecasting with VECM in Namibia, Lesotho, South Africa and Swaziland, 1981-2004. Journal of Applied Econometrics and international Development. Vol 6, No 9.
[28] Kofi, M.2009. Fiscal policy and economic growth in south Africa. Oxford University.
[29] Kutter, K.N. and A.S. Posen, 2001. Passive savers and fiscal policy effectiveness in Japan. Research Department, http://www.iie.com/publications/wp/02-2.pdf.
[30] Kutter, N.K. and A.S. Posen,. 2002. Fiscal policy effectiveness in japan. Journal of the Japanese and international economics, 4: 536-558.
[31] Lutkepohl, H., 2005. New Introduction to Multiple Time Series Analysis. 2nd Edn., Springer-Verlag, London,ISBN-10:764..
[32] Mallinck, S., 2010. Macroeconomic shocks, monetary policy and implicit exchange rate targeting in India. Queen Mary university of India
[33] Maroney, N.C., M.K. Hassan, S.A. Basher and I. Isik,. 2004. A macroeconomic model for Bangladesh economy and its policy implications. Journal of Developing Areas. 38: 135 -149.
[34] Misati, R.N. and Nyamongo, E.M 2011. Asset price and monetary policy in Kenya. Research Department Central Bank of Kenya.
[35] Misati, R.N. E.M. Nyamongo and W.A. Kamau, 2011. Interest rate pass-through in Kenya. Int. J. Develop. Issues, 10: 170-182.
[36] Mohammad, S.D., S.K.A. Wasti, I. Lal and A. Hussain, 2009. An empirical investigation between money supply government expenditure, output & prices: The Pakistan evidence. Eur. J. Econ. Fin. Admin. Sci., 17: 60-
[37] Mountford, A. and H. Uhlig, 2005. What are the effects of fiscal policy shocks. Discussion paper 2005-039, http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-039.pdf.
[38] Kallick, T. and Mwega, F.M.1990.Monetary policy in Kenya. Working paper
[39] Nyamongo, E.M., M.M. Sichei and N.K. Mutai, 2008. The monetary and fiscal policy interaction in Kenya. Research Department, Central Bank of Kenya.
[40] Olaloye, A.O. and S.I. Ikhide, 1995. Economic Sustainability and the Role of Fiscal and Monetary Policies in A Depressed Economy: The Case Study of Nigeria. Sustainable Development, 3:89-100.
[41] Oliver, B. and S. Fisher, 1989. Lecture on Macroeconomics. The MIT press. London.
[42] Olaloye, A. O. and Ikhide, S. I. 1995.Economic Sustainability and the Role of Fiscal and Monetary Policies in A Depressed Economy: The Case Study of Nigeria. Sustainable Development, Vol. ,3:89-100
[43] Rahman, H., 2005. Relative effectiveness of monetary and fiscal policies and output growth in Bangladesh VAR approach. Research Department Bangladesh Bank.
[44] Ramsey, V.A. and M.D. Shapiro, 1998. Costly capital reallocation and the effects of government spending. Carnegie-Rochester Conf. Ser. Public Policy, 48: 145-194.
[45] Rozina, S. and P. Tuner, 2008. Measuring the Dynamic effects of Fiscal policy Shocks in Pakistan. Loughborough University, UK,
[46] Saibu, M.O. and S.I. Oladeji, 2008. Openness and the Effects of Fiscal and Monetary Policy Shocks on Real Output in Nigeria (1960–2003). Africa Development Review. 30: 529 -548
[47] Senbet, D., 2011. The relative impact of Fiscal verses monetary actions on output: VAR approach. Bus. Econ. J., 2011: 1-11
[48] Sims, C. 1980. Macroeconomics and reality. Econometrica, 48(1):1-48
[49] Stock, J.H. and M.W. Watson,2001. Vector auto regressions. J. Econ. Perspect., 4: 101-115
[50] Suleiman, D. Wasti, S. Lal, I and Adnan, H 2009.An empirical investigation between Money supply, Government expenditure, output and prices .European Journal of Economics Finance and Administrative science, ISSN 1450-2275.
[51] Uhlig, H., 2005.What are the effects of monetary policy on output? Results from an agnostic identification procedure. J. Monetary Econo. 52: 381-419.
[52] Waud, R. 1974. Monetary and Fiscal Effects on Economic Activity: Reduced Form Examination of Their Relative Importance," Review of Economics and Statistics, (May), 177-87
Cite This Article
  • APA Style

    Mutuku Cyrus, koech Elias. (2014). Monetary and Fiscal Policy Shocks and Economic Growth in Kenya: VAR Econometric Approach. Journal of World Economic Research, 3(6), 95-108. https://doi.org/10.11648/j.jwer.20140306.14

    Copy | Download

    ACS Style

    Mutuku Cyrus; koech Elias. Monetary and Fiscal Policy Shocks and Economic Growth in Kenya: VAR Econometric Approach. J. World Econ. Res. 2014, 3(6), 95-108. doi: 10.11648/j.jwer.20140306.14

    Copy | Download

    AMA Style

    Mutuku Cyrus, koech Elias. Monetary and Fiscal Policy Shocks and Economic Growth in Kenya: VAR Econometric Approach. J World Econ Res. 2014;3(6):95-108. doi: 10.11648/j.jwer.20140306.14

    Copy | Download

  • @article{10.11648/j.jwer.20140306.14,
      author = {Mutuku Cyrus and koech Elias},
      title = {Monetary and Fiscal Policy Shocks and Economic Growth in Kenya: VAR Econometric Approach},
      journal = {Journal of World Economic Research},
      volume = {3},
      number = {6},
      pages = {95-108},
      doi = {10.11648/j.jwer.20140306.14},
      url = {https://doi.org/10.11648/j.jwer.20140306.14},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20140306.14},
      abstract = {In macroeconomic policy design and management, monetary and fiscal policies are of great essence. However, the relative effectiveness of these policies has been subject to debate in both theoretical and practical realms for a long period of time. This paper investigated the relative potency of the policies in altering real output in Kenya using a recursive vector autoregressive (VAR) framework. The analysis of variance decomposition and impulse response functions reveled that fiscal policy has a significant positive impact on real output growth in Kenya while monetary policy shocks are completely insignificant with fiscal policy shock significantly alters the real output for a period of almost eight quarters.},
     year = {2014}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Monetary and Fiscal Policy Shocks and Economic Growth in Kenya: VAR Econometric Approach
    AU  - Mutuku Cyrus
    AU  - koech Elias
    Y1  - 2014/11/25
    PY  - 2014
    N1  - https://doi.org/10.11648/j.jwer.20140306.14
    DO  - 10.11648/j.jwer.20140306.14
    T2  - Journal of World Economic Research
    JF  - Journal of World Economic Research
    JO  - Journal of World Economic Research
    SP  - 95
    EP  - 108
    PB  - Science Publishing Group
    SN  - 2328-7748
    UR  - https://doi.org/10.11648/j.jwer.20140306.14
    AB  - In macroeconomic policy design and management, monetary and fiscal policies are of great essence. However, the relative effectiveness of these policies has been subject to debate in both theoretical and practical realms for a long period of time. This paper investigated the relative potency of the policies in altering real output in Kenya using a recursive vector autoregressive (VAR) framework. The analysis of variance decomposition and impulse response functions reveled that fiscal policy has a significant positive impact on real output growth in Kenya while monetary policy shocks are completely insignificant with fiscal policy shock significantly alters the real output for a period of almost eight quarters.
    VL  - 3
    IS  - 6
    ER  - 

    Copy | Download

Author Information
  • Kenya Institute for Public Policy research and Analysis, Nairobi, Kenya

  • School of Business and Economics, Mount Kenya University , Nairobi, Kenya

  • Sections