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Efficacy of Fiscal and Monetary Policy in Sierra Leone: An ARDL Bound Testing Approach

Author

Listed:
  • Abu Bakarr Tarawalie

    (Department of Economics and Commerce, Fourah Bay College, University of Sierra Leone, Sierra Leone)

  • Noah Kargbo

    (Department of Economics and Commerce, Fourah Bay College, University of Sierra Leone, Sierra Leone)

Abstract

This paper empirically examines the relative effectiveness of fiscal and monetary policies on economic growth in Sierra Leone. The study utilizes annual time series data, spanning from 1980 to 2017, within an Autoregressive distributed Lag (ARDL) Bound Testing estimation framework popularized by Pesaran and Shin (1998). The unit root test results show that all the variables are integrated of order one, i.e. I(1), and the cointegration bound testing results confirm the existence of cointegration amongst the variables. The study reveals that monetary policy is more effective than fiscal policy in promoting economic growth in Sierra Leone. Specifically, the findings show that money supply, real exchange rate and inflation are the significant variables that influence economic growth in the long run. Whilst the finding shows a positive relationship between money supply and economic growth, it however reveals a negative relationship for both real exchange rate and inflation on growth during the study period. The short run dynamics also reveals that money supply, government revenue, government expenditure and war dummy are the main variables influencing real GDP growth in Sierra Leone. Furthermore, the result shows that 24% of the disequilibrium in real GDP is corrected within a year. The study recommends that monetary and fiscal policies should be well coordinated and government should implement a balanced budget in order to overcome the issue of fiscal dominance in the Sierra Leone economy.

Suggested Citation

  • Abu Bakarr Tarawalie & Noah Kargbo, 2020. "Efficacy of Fiscal and Monetary Policy in Sierra Leone: An ARDL Bound Testing Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 10(3), pages 217-224.
    • Handle: RePEc:eco:journ1:2020-03-26
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Economic growth; fiscal policy; monetary policy; Autoregressive distributed lag; Sierra Leone;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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