Asymmetric Effectiveness of Monetary and Fiscal Policies: Evidence from Turkey
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Published
Jun 13, 2022
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Abstract
This study assesses the asymmetric effectiveness of Turkey's monetary policy and fiscal policy under the inflation targeting regime in the period of 2006-2020. We employed the non-linear autoregressive distributed lag (NARDL) method and Hatemi-J asymmetric causality test with the assistance of the St. Louis equation, which relates the growth in nominal income with the growth in money supply and public expenditures. The NARDL model revealed that an increase in money supply and gross domestic product (GDP) has a positive relationship. On the other hand, a decrease in money supply and government expenditures have no significant relationship with GDP. In addition, Hatemi-J asymmetric causality results showed an asymmetric causality between money supply and GDP. It demonstrates that the money supply in Turkey during the period 2006-2020 is endogenous.
JEL classification: C22, E63, E52
Keywords: St. Louis equation, NARDL, Asymmetric causality
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Öztürk, C. and Altınkaynak, G. (2022) “Asymmetric Effectiveness of Monetary and Fiscal Policies: Evidence from Turkey”, World Journal of Applied Economics, 8(1), pp. 1-14. doi: 10.22440/wjae.8.1.1.
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References
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Akyurek, C., Kutan, A. M., & Yilmazkuday, H. (2011). Can Inflation Targeting Regimes be Effective in Developing Countries? The Turkish Experience. Journal of Asian Economics, 22, 343–355. doi:10.1016/j.asieco.2011.05.004
Alavi, S. E., Moshiri, S., & Sattarifar, M. (2016). An Analysis of the Efficiency of the Monetary and Fiscal Policies in Iran Economy using IS–MP–AS Model. Procedia Economics and Finance, 36, 522–531.
Andersen, L. C., & Carlson, K. (1970). A Monetarist Model for Economic Stabilization. Federal Reserve Bank of St. Louis.
Andersen, L. C., & Jordan, J. L. (1968). Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization. Review.
Awdeh, A. (2019). Monetary Policy and Economic Growth in Lebanon. Journal of Central Banking Theory and Practice, 8, 147–171. doi:10.2478/jcbtp-2019-0018
Batten, D. S., Hafer, R. W., & others. (1983). The Relative Impact of Monetary and Fiscal Actions on Economic Activity: A Cross-country Comparison. Review, 65, 5–12. doi:10.20955/r.65.5-12.mbu
Carlson, K. M. (1978). Does the St. Louis Equation now Believe in Fiscal Policy? Review, 1, 13–19. doi:10.20955/r.60.13-19.swb
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Chowdhury, A. R. (1986). Monetary and Fiscal Impacts on Economic Activities in Bangladesh: A Note. The Bangladesh Development Studies, 14, 101–106.
Civcir, I., & Akcaglayan, A. (2010). Inflation Targeting and the Exchange Rate: Does it Matter in Turkey? Journal of Policy Modeling, 32, 339–354. doi:10.1016/j.jpolmod.2010.03.002
Darrat, A. F. (1984). The Dominant Influence of Fiscal Actions in Developing Countries. Eastern Economic Journal, 10, 271–284.
De Leeuw, F., Kalchbrenner, J., Anderson, L. C., & Jordan, J. L. (1969). Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization. Research Department, Federal Reserve Bank of St. Louis.
Ekelund Jr, R. B., & Hebert, R. F. (1997). A History of Economic Theory and Method. McGraw Hill.
Enders, W. (2008). Applied Econometric Time Series. John Wiley & Sons.
Eroglu, I., Cinar, M., & Eroglu, N. (2017). An Evaluation of the Effectiveness of an Inflation Targeting Strategy in Turkey. Economic Research-Ekonomska istrazivanja, 30, 1536–1552. doi:10.1080/1331677X.2017.1340172
Evans, O., Adeniji, S., Nwaogwugwu, I., Kelikume, I., Dakare, O., Oke, O., & others. (2018). The Relative Effect of Monetary and Fiscal Policy on Economic Development in Africa: A GMM Approach to the St. Louis Equation. BizEcons Quarterly, 2, 3–23.
Friedman, B. M. (1977). Even the St. Louis Model Now Believes in Fiscal Policy: Note. Journal of Money, Credit and Banking, 9, 365–367. doi:10.2307/1991986
Friedman, B. M., & Kuttner, K. N. (1992). Money, Income, Prices and Interest Rates. American Economic Review, 82(3), 472–492.
Friedman, M., & Meiselman, D. (1963). The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958. University of Chicago.
Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States 1867-1960. A Monetary History of the United States 1867-1960. Princeton University Press.
Hatemi-j, A. (2003). A New Method to Choose Optimal Lag Order in Stable and Unstable VAR Models. Applied Economics Letters, 10, 135–137. doi:10.1080/1350485022000041050
Hatemi-j, A. (2012). Asymmetric Causality Tests with an Application. Empirical economics, 43, 447–456. doi:10.1007/s00181-011-0484-x
Jawadi, F., Mallick, S. K., & Sousa, R. M. (2016). Fiscal and Monetary Policies in the BRICS: A Panel VAR Approach. Economic Modelling, 58, 535–542. doi:10.1016/j.econmod.2015.06.001
Jithin, P., & Suresh, B. M. (2020). Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach. Journal of Central Banking Theory and Practice, 9, 163–182. doi:10.2478/jcbtp-2020-0042
Kara, A. H., & Orak, M. (2008). Enflasyon Hedeflemesi - Inflation Targeting (in Turkish). In E. Kumcu (Ed.), Krizler, Para ve Iktisatcilar (pp. 81–157). Remzi Kitabevi, Istanbul.
Karagol, V., & Benli, A. (2019). BRICS-T Ulkelerinde Para ve Maliye Politikalarinin Etkinligi - Effectiveness of Monetary and Fiscal Policies in the BRICS-T Countries (in Turkish). Anadolu Universitesi Iktisadi ve Idari Bilimler Fakultesi Dergisi, 20(3), 60–71.
Kuttner, K. N., & Posen, A. S. (2002). Fiscal Policy Effectiveness in Japan. Journal of the Japanese and International Economies, 16, 536–558. doi::10.1006/jjie.2002.0512
Landreth, H., & Colander, D. C. (2002). History of Economic Thought. McGraw Hill.
Masson, M. P., Savastano, M. M., & Sharma, M. S. (1997). The Scope for Inflation Targeting in Developing Countries. International Monetary Fund.
McCallum, B. T. (1985). Monetary vs. Fiscal Policy Effects: A Review of the Debate. NBER Working Paper. doi:10.3386/w1556
Mishkin, F. S. (2000). Inflation Targeting in Emerging-market Countries. American Economic Review, 90, 105–109. doi:10.1257/aer.90.2.105
Namahoro, J. P., Wu, Q., Xiao, H., & Zhou, N. (2021). The Impact of Renewable Energy, Economic and Population Growth on CO2 Emissions in the East African Region: Evidence from Common Correlated Effect Means Group and Asymmetric Analysis. Energies, 14, 312. doi:10.3390/en14020312
Okorie, D. I., Sylvester, M. A., & Simon-Peter, D.-A. C. (2017). Relative Effectiveness of Fiscal and Monetary Policies in Nigeria. Asian Journal of Social Science Studies, 2, 1.
Oryani, B., Koo, Y., Rezania, S., & Shafiee, A. (2021). Investigating the Asymmetric Impact of Energy Consumption on Reshaping Future Energy Policy and Economic Growth in Iran using Extended Cobb-Douglas Production Function. Energy, 216, 119187. doi:10.1016/j.energy.2020.119187
Ozer, M., & Karagol, V. (2018). Relative Effectiveness of Monetary and Fiscal Policies on Output Growth in Turkey: An ARDL Bounds Test Approach. Equilibrium. Quarterly Journal of Economics and Economic Policy, 13, 391–409. doi:10.24136/eq.2018.019
Pesaran, H., & Shin, Y. (1999). An Autoregressive Distributed Lag Modelling Approach to Cointegration. Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium.
Pesaran, M. H., & Pesaran, B. (1997). Working with Microfit 4.0: Interactive Econometric Analysis. Oxford University Press.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326. doi:10.1002/jae.616
Senbet, D. (2011). The Relative Impact of Fiscal versus Monetary Actions on Output: A vector Autoregressive (VAR) Approach. Business and Economics Journal.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In R. C. Sickles, & W. C. Horrace (Eds.), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications (pp. 281–314). Springer New York. doi:10.1007/978-1-4899-8008-3_9
Svensson, L. E. (2010). Inflation Targeting. In Handbook of Monetary Economics (Vol. 3, pp. 1237–1302). Elsevier.
Thornton, J. (1993). Money, Output and Stock Prices in the UK: Evidence on Some (non) Relationships. Applied Financial Economics, 3, 335–338. doi:10.1080/758534946
Topcu, M., & Kuloglu, A. (2012). Total Spending Equation of St. Louis Model: A Causality Analysis for Turkish Economy. Chinese Business Review, 11.
Walsh, C. E. (2017). Monetary Theory and Policy. MIT press.
Ajayi, M. A., & Aluko, O. A. (2017). Evaluating the Relative Impact of Monetary and Fiscal Policy in Nigeria using the St. Louis Equation. Acta Universitatis Danubius: Oeconomica, 13.
Ajisafe, R. A., & Folorunso, B. A. (2002). The Relative Effectiveness of Fiscal and Monetary Policy in Macroeconomic Management in Nigeria. The African Economic and Business Review, 3, 23–40.
Akyazi, H., & Ekinci, A. (2009). Turkiye'de 2000 Sonrasi Uygulanan Para Politikasi Stratejilerinin Makroekonomik Performanslarinin Degerlendirilmesi - Evaluation of the Macroeconomic Performances of Monetary Policy Strategies Applied after 2000 in Turkey (in Turkish). Ataturk Universitesi Iktisadi ve Idari Bilimler Dergisi, 23(1), 345-362.
Akyurek, C., Kutan, A. M., & Yilmazkuday, H. (2011). Can Inflation Targeting Regimes be Effective in Developing Countries? The Turkish Experience. Journal of Asian Economics, 22, 343–355. doi:10.1016/j.asieco.2011.05.004
Alavi, S. E., Moshiri, S., & Sattarifar, M. (2016). An Analysis of the Efficiency of the Monetary and Fiscal Policies in Iran Economy using IS–MP–AS Model. Procedia Economics and Finance, 36, 522–531.
Andersen, L. C., & Carlson, K. (1970). A Monetarist Model for Economic Stabilization. Federal Reserve Bank of St. Louis.
Andersen, L. C., & Jordan, J. L. (1968). Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization. Review.
Awdeh, A. (2019). Monetary Policy and Economic Growth in Lebanon. Journal of Central Banking Theory and Practice, 8, 147–171. doi:10.2478/jcbtp-2019-0018
Batten, D. S., Hafer, R. W., & others. (1983). The Relative Impact of Monetary and Fiscal Actions on Economic Activity: A Cross-country Comparison. Review, 65, 5–12. doi:10.20955/r.65.5-12.mbu
Carlson, K. M. (1978). Does the St. Louis Equation now Believe in Fiscal Policy? Review, 1, 13–19. doi:10.20955/r.60.13-19.swb
Central Bank of the Republic of Turkey. (2018). Central Bank Monetary Policy Framework. Central Bank Monetary Policy Framework.
Chowdhury, A. R. (1986). Monetary and Fiscal Impacts on Economic Activities in Bangladesh: A Note. The Bangladesh Development Studies, 14, 101–106.
Civcir, I., & Akcaglayan, A. (2010). Inflation Targeting and the Exchange Rate: Does it Matter in Turkey? Journal of Policy Modeling, 32, 339–354. doi:10.1016/j.jpolmod.2010.03.002
Darrat, A. F. (1984). The Dominant Influence of Fiscal Actions in Developing Countries. Eastern Economic Journal, 10, 271–284.
De Leeuw, F., Kalchbrenner, J., Anderson, L. C., & Jordan, J. L. (1969). Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization. Research Department, Federal Reserve Bank of St. Louis.
Ekelund Jr, R. B., & Hebert, R. F. (1997). A History of Economic Theory and Method. McGraw Hill.
Enders, W. (2008). Applied Econometric Time Series. John Wiley & Sons.
Eroglu, I., Cinar, M., & Eroglu, N. (2017). An Evaluation of the Effectiveness of an Inflation Targeting Strategy in Turkey. Economic Research-Ekonomska istrazivanja, 30, 1536–1552. doi:10.1080/1331677X.2017.1340172
Evans, O., Adeniji, S., Nwaogwugwu, I., Kelikume, I., Dakare, O., Oke, O., & others. (2018). The Relative Effect of Monetary and Fiscal Policy on Economic Development in Africa: A GMM Approach to the St. Louis Equation. BizEcons Quarterly, 2, 3–23.
Friedman, B. M. (1977). Even the St. Louis Model Now Believes in Fiscal Policy: Note. Journal of Money, Credit and Banking, 9, 365–367. doi:10.2307/1991986
Friedman, B. M., & Kuttner, K. N. (1992). Money, Income, Prices and Interest Rates. American Economic Review, 82(3), 472–492.
Friedman, M., & Meiselman, D. (1963). The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958. University of Chicago.
Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States 1867-1960. A Monetary History of the United States 1867-1960. Princeton University Press.
Hatemi-j, A. (2003). A New Method to Choose Optimal Lag Order in Stable and Unstable VAR Models. Applied Economics Letters, 10, 135–137. doi:10.1080/1350485022000041050
Hatemi-j, A. (2012). Asymmetric Causality Tests with an Application. Empirical economics, 43, 447–456. doi:10.1007/s00181-011-0484-x
Jawadi, F., Mallick, S. K., & Sousa, R. M. (2016). Fiscal and Monetary Policies in the BRICS: A Panel VAR Approach. Economic Modelling, 58, 535–542. doi:10.1016/j.econmod.2015.06.001
Jithin, P., & Suresh, B. M. (2020). Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach. Journal of Central Banking Theory and Practice, 9, 163–182. doi:10.2478/jcbtp-2020-0042
Kara, A. H., & Orak, M. (2008). Enflasyon Hedeflemesi - Inflation Targeting (in Turkish). In E. Kumcu (Ed.), Krizler, Para ve Iktisatcilar (pp. 81–157). Remzi Kitabevi, Istanbul.
Karagol, V., & Benli, A. (2019). BRICS-T Ulkelerinde Para ve Maliye Politikalarinin Etkinligi - Effectiveness of Monetary and Fiscal Policies in the BRICS-T Countries (in Turkish). Anadolu Universitesi Iktisadi ve Idari Bilimler Fakultesi Dergisi, 20(3), 60–71.
Kuttner, K. N., & Posen, A. S. (2002). Fiscal Policy Effectiveness in Japan. Journal of the Japanese and International Economies, 16, 536–558. doi::10.1006/jjie.2002.0512
Landreth, H., & Colander, D. C. (2002). History of Economic Thought. McGraw Hill.
Masson, M. P., Savastano, M. M., & Sharma, M. S. (1997). The Scope for Inflation Targeting in Developing Countries. International Monetary Fund.
McCallum, B. T. (1985). Monetary vs. Fiscal Policy Effects: A Review of the Debate. NBER Working Paper. doi:10.3386/w1556
Mishkin, F. S. (2000). Inflation Targeting in Emerging-market Countries. American Economic Review, 90, 105–109. doi:10.1257/aer.90.2.105
Namahoro, J. P., Wu, Q., Xiao, H., & Zhou, N. (2021). The Impact of Renewable Energy, Economic and Population Growth on CO2 Emissions in the East African Region: Evidence from Common Correlated Effect Means Group and Asymmetric Analysis. Energies, 14, 312. doi:10.3390/en14020312
Okorie, D. I., Sylvester, M. A., & Simon-Peter, D.-A. C. (2017). Relative Effectiveness of Fiscal and Monetary Policies in Nigeria. Asian Journal of Social Science Studies, 2, 1.
Oryani, B., Koo, Y., Rezania, S., & Shafiee, A. (2021). Investigating the Asymmetric Impact of Energy Consumption on Reshaping Future Energy Policy and Economic Growth in Iran using Extended Cobb-Douglas Production Function. Energy, 216, 119187. doi:10.1016/j.energy.2020.119187
Ozer, M., & Karagol, V. (2018). Relative Effectiveness of Monetary and Fiscal Policies on Output Growth in Turkey: An ARDL Bounds Test Approach. Equilibrium. Quarterly Journal of Economics and Economic Policy, 13, 391–409. doi:10.24136/eq.2018.019
Pesaran, H., & Shin, Y. (1999). An Autoregressive Distributed Lag Modelling Approach to Cointegration. Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium.
Pesaran, M. H., & Pesaran, B. (1997). Working with Microfit 4.0: Interactive Econometric Analysis. Oxford University Press.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326. doi:10.1002/jae.616
Senbet, D. (2011). The Relative Impact of Fiscal versus Monetary Actions on Output: A vector Autoregressive (VAR) Approach. Business and Economics Journal.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In R. C. Sickles, & W. C. Horrace (Eds.), Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications (pp. 281–314). Springer New York. doi:10.1007/978-1-4899-8008-3_9
Svensson, L. E. (2010). Inflation Targeting. In Handbook of Monetary Economics (Vol. 3, pp. 1237–1302). Elsevier.
Thornton, J. (1993). Money, Output and Stock Prices in the UK: Evidence on Some (non) Relationships. Applied Financial Economics, 3, 335–338. doi:10.1080/758534946
Topcu, M., & Kuloglu, A. (2012). Total Spending Equation of St. Louis Model: A Causality Analysis for Turkish Economy. Chinese Business Review, 11.
Walsh, C. E. (2017). Monetary Theory and Policy. MIT press.