Revista de Economía y Negocios

The Impact of Monetary and Fiscal Policies on Real Output: A Re-examination

Abstract

Ali F Darrat, Kenneth A Tah and Cedric L Mbanga

Research continues to investigate the relative efficacy of monetary and fiscal policies for stabilizing the US economy, a debate that began with Anderson and Jordan’s well-known study. This paper examines the contention of Senbet that monetary policy matters for stabilizing real economic activities; fiscal policy does not. We show that this claim is unfounded and apparently the outcome of prematurely dismissing fiscal policy from the cointegrating vector. In the context of a properly specified model, results we obtained from cointegration and error-correction tests using data and time period similar to Senbet’s consistently suggest that only fiscal policy Granger-causes real output over the long-run. Moreover both monetary and fiscal actions Granger-cause significant short-run effects on the real side of the economy.