US Monetary-Fiscal Policy Mix Evidence from a Quatrovariate VECM

Authors

  • George K. Zestos Christopher Newport University, United States
  • Andrew N. Geary Christopher Newport University, Indiana University and John Hopkins University, United States
  • Kevin S. Cooksey Christopher Newport University, Indiana University and John Hopkins University, United States

DOI:

https://doi.org/10.32890/ijbf2011.8.2.3

Keywords:

Fiscal policy mix, VECM, Granger causality, real vs nominal income, interest rates, fed deficit, fed rate

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.

 

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Published

04-06-2011

Issue

Vol. 8 No. 2 (2011): International Journal of Banking and Finance (IJBF) Vol. 8, No.2, 2011

Section

Articles

How to Cite

Zestos, G. K., Geary, A. N., & Cooksey, K. S. (2011). US Monetary-Fiscal Policy Mix Evidence from a Quatrovariate VECM. International Journal of Banking and Finance, 8(2), 40-67. https://doi.org/10.32890/ijbf2011.8.2.3

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Identifiers DOI 10.32890/ijbf2011.8.2.3 OpenAlex W80537109