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Investigating Fiscal and Monetary Policies Coordination and Public Debt in Kenya: Evidence from regime-switching and self-exciting threshold autoregressive models

Author

Listed:
  • William Ng'ang'a

    (UP8 - Université Paris 8 Vincennes-Saint-Denis, Strathmore University [Nairobi])

  • Julien Chevallier

    () (IPAG Paris, UP8 - Université Paris 8 Vincennes-Saint-Denis)

  • Simon Ndiritu

    (Strathmore University [Nairobi])

Abstract

This study explored the nature of fiscal and monetary policy coordination and its impact on long-run sustainability in Kenya. The study employed annual time series data from 1963 to 2014. Two objectives were investigated. (i) The determinants of monetary and fiscal policy rules under different policy regimes. (ii) The nature of fiscal and monetary policy regimes coordination in Kenya. Markov switching models were used to determine fiscal and monetary policy regimes endogenously. Fiscal policy regime was regarded as passive if the coefficient of debt in the MS model was significant and negative. This fiscal policy regime is regarded as unsustainable since the rise in debt is associated with a deterioration of the fiscal balance. On the other hand, the active monetary policy is synonymous with contractionary monetary policy since real in interest rate reacts positively to an increase in inflation. Robust analysis conducted using self-exciting threshold models confirms that monetary and fiscal policy reaction functions are nonlinear. The study findings show that passive or unsustainable fiscal regime was more dominant over the study period. There is evidence to support coordination between fiscal and monetary policy. There is a tendency for monetary policy to actively and prudently respond to unsustainable fiscal policy. Secondly, monetary policy sequentially responds to fiscal policy. The study recommended the adoption of systematic monetary response to a periodic deviation of fiscal policy from a long-run sustainability path. JEL Codes: E62; F30; H61

Suggested Citation

  • William Ng'ang'a & Julien Chevallier & Simon Ndiritu, 2019. "Investigating Fiscal and Monetary Policies Coordination and Public Debt in Kenya: Evidence from regime-switching and self-exciting threshold autoregressive models," Working Papers halshs-02156495, HAL.
  • Handle: RePEc:hal:wpaper:halshs-02156495
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-02156495
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    References listed on IDEAS

    as
    1. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2001. "Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence," Working Papers 2002_13, Business School - Economics, University of Glasgow, revised Oct 2002.
    2. Eusepi, Stefano & Preston, Bruce, 2011. "Learning the fiscal theory of the price level: Some consequences of debt-management policy," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 358-379.
    3. Muhammad Farooq Arby & Muhammad Nadeem Hanif, 2010. "Monetary and Fiscal Policies Coordination: Pakistan’s Experience," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 6, pages 3-13.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Policy regimes; Fiscal and Monetary policy management; Markov-Switching; SETAR;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F30 - International Economics - - International Finance - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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