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Relative Effectiveness of Monetary and Fiscal Policies on Output Growth in Bangladesh: A VAR Approach

  • Md. Habibur Rahman
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    This paper investigates the relative importance of monetary and fiscal policies in altering real output of Bangladesh. An unrestricted vector auto regression (VAR) framework based on the St. Louis equations, is used to compute variance decompositions (VDCs)and impulse response function (IRF) through 1000 Monte Carlo Simulations. A 'Monetary— Fiscal Game' under oligopolistic framework is also used to justify the co-ordination and co-operation between the monetary and fiscal authorities. The outcomes of this study imply that monetary policy is relatively more effective than fiscal policy in stimulating real economic activity. The results also confirm the presence of interactions between monetary and fiscal policies. [BB WP no.0601]

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    Paper provided by eSocialSciences in its series Working Papers with number id:2100.

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    Date of creation: Jun 2009
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    Handle: RePEc:ess:wpaper:id:2100
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    1. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
    2. Friedman, Benjamin M, 1977. "Even the St. Louis Model Now Believes in Fiscal Policy: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(2), pages 365-67, May.
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    6. Ali F. Darrat, 1984. "The Dominant Influence of Fiscal Actions in Developing Countries," Eastern Economic Journal, Eastern Economic Association, vol. 10(3), pages 271-284, Jul-Sep.
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    8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    9. Gramlich, Edward M, 1971. "The Usefulness of Monetary and Fiscal Policy as Discretionary Stabilization Tools," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(2), pages 506-32, May.
    10. Ahmed, Ehsan & Johannes, James M, 1984. "St. Louis Equation Restrictions and Criticisms Revisited: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 514-20, November.
    11. NAJAM us SAQIB & ATTIYA YASMIN, 1987. "Some Econometric Evidence on the Relative Importance of Monetary and Fiscal Policy in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 26(4), pages 541-551.
    12. Keith M. Carlson, 1978. "Does the St. Louis equation now believe in fiscal policy?," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 13-19.
    13. Leonall C. Andersen & Jerry L. Jordon, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 11-23.
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