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How does fiscal policy affect monetary policy in the Southern African Community (SADC)?

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  • Obinyeluaku, Moses
  • Viegi, Nicola

Abstract

Fiscal policy can affect monetary policy either through debt monetisation or through a direct effect on price dynamics. The former is the conventional classical view rooted in the quantity theory of money while the latter is the modern view of the Fiscal Theory of Price Determination. Based on the dynamic response of inflation to different shocks, we test the relationship between fiscal balances and monetary stability in 10 SADC countries. Results show that five out of 10 countries considered here were characterised throughout the period 1980-2006 by fiscally dominant regimes, with weak or no response of primary surpluses to public liabilities. The remaining five countries exhibit a monetary dominant regime. The study also finds that changes in primary surpluses affect price variability via aggregate demand, suggesting that fiscal outcomes could be a direct source of inflation variability, hence, the need for policy coordination in the region.

Suggested Citation

  • Obinyeluaku, Moses & Viegi, Nicola, 2009. "How does fiscal policy affect monetary policy in the Southern African Community (SADC)?," MPRA Paper 15372, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:15372
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    References listed on IDEAS

    as
    1. International Monetary Fund, 2008. "Fiscal and Monetary Anchors for Price Stability; Evidence from Sub-Saharan Africa," IMF Working Papers 08/121, International Monetary Fund.
    2. Buiter, Willem H., 1998. "The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs and Fiscal Theories of the Price Level," CEPR Discussion Papers 1799, C.E.P.R. Discussion Papers.
    3. Bennett T. McCallum, 1999. "Theoretical Issues Pertaining to Monetary Unions," NBER Working Papers 7393, National Bureau of Economic Research, Inc.
    4. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    5. Evan Tanner & Alberto Ramos, 2003. "Fiscal sustainability and monetary versus fiscal dominance: evidence from Brazil, 1991-2000," Applied Economics, Taylor & Francis Journals, vol. 35(7), pages 859-873.
    6. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
    7. Carlo A. Favero & Francesco Giavazzi, 2004. "Inflation Targeting and Debt: Lessons from Brazil," NBER Working Papers 10390, National Bureau of Economic Research, Inc.
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    9. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
    10. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
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    12. Luca Sala, 2004. "The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence," Working Papers 257, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    More about this item

    Keywords

    African Economic Integration; Fiscal Monetary Policy Coordination; VAR Analysis.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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