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

Olaniyi Evans, Sesan Adeniji, Isaac Nwaogwugwu, Ikechukwu Kelikume, Olamitunji Dakare and Olubode Oke
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Sesan Adeniji: Department of Economics, University of Abuja, Nigeria.
Isaac Nwaogwugwu: Department of Economics, University of Lagos, Lagos, Nigeria.
Ikechukwu Kelikume: Lagos Business School, Lagos, Nigeria.
Olamitunji Dakare: School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria.
Olubode Oke: Department of Accounting, Nassarawa State University, Keffi, Nigeria

BizEcons Quarterly, 2018, vol. 2, 3-23

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.

Keywords: Monetary policy; Fiscal policy; Economic development; GMM; St Louis equation (search for similar items in EconPapers)
JEL-codes: C32 E22 H54 O23 O54 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (11)

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