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US Monetary-Fiscal Policy Mix Evidence from a Quatrovariate VECM

Zestos, George K. and Geary, Andrew N. and Cooksey, Kevin S. (2011) US Monetary-Fiscal Policy Mix Evidence from a Quatrovariate VECM. International Journal of Banking and Finance (IIJBF), 8 (2). pp. 40-67. ISSN 1675-7227

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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.

Item Type: Article
Uncontrolled Keywords: Fiscal policy mix, VECM, Granger causality, real vs nominal income, interest rates, fed deficit, fed rate
Subjects: H Social Sciences > HG Finance
Divisions: School of Economics, Finance & Banking
Depositing User: Mrs. Norazmilah Yaakub
Date Deposited: 25 Oct 2018 02:13
Last Modified: 25 Oct 2018 02:13
URI: http://repo.uum.edu.my/id/eprint/25041

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