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The relative effect of monetary and fiscal policy on economic development in Africa: a GMM approach to the St. Louis equation

Author

Listed:
  • Evans, Olaniyi

    () (School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria.)

  • Adeniji, Sesan

    (Department of Economics, University of Abuja, Nigeria.)

  • Nwaogwugwu, Isaac

    (Department of Economics, University of Lagos, Lagos, Nigeria.)

  • Kelikume, Ikechukwu

    (Lagos Business School, Lagos, Nigeria.)

  • Dakare, Olamitunji

    (School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria.)

  • Oke, Olubode

    (Department of Accounting, Nassarawa State University, Keffi, Nigeria)

Abstract

With the aid of the St. Louis equation and the general method of moments (GMM) approach, this study investigates the relative effect of monetary and fiscal policy on economic development in Africa within the period 1995–2016. The study shows that money supply has significant positive relationship with GDP per capita while interest rate has significant negative effects. Government spending has significant negative relationship with GDP per capita while taxation has significant positive effects. Other macroeconomic variables such as primary enrollment and openness to trade have significant positive effects while inflation has negative effects. The environmental variable, carbon emissions, has significant negative effects. Among the institutional variables, corruption has significant negative effects. The results therefore support both Keynesian and monetarist positive policy assertions: Money supply, interest rate, government spending and taxation are viable instruments to stabilize output. However, this study shows that utilizing monetary policy and interest rate as policy tools is more powerful than using government spending and taxation. This is in line with the predictions of Milton Friedman and Schwartz (1963) and other advocates of the St. Louis equation. Therefore, in order to attain higher economic development, African economies should rely more on monetary policy as compared to fiscal policy.

Suggested Citation

  • Evans, Olaniyi & Adeniji, Sesan & Nwaogwugwu, Isaac & Kelikume, Ikechukwu & Dakare, Olamitunji & Oke, Olubode, 2018. "The relative effect of monetary and fiscal policy on economic development in Africa: a GMM approach to the St. Louis equation," Business and Economic Quarterly, International Society for Business & Economics, vol. 2, pages 3-23.
  • Handle: RePEc:ris:buecqu:0003
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    More about this item

    Keywords

    Monetary policy; Fiscal policy; Economic development; GMM; St Louis equation;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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