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

Author

Listed:
  • Evans, Olaniyi

    (School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria.)

  • Adeniji, Sesan

    (Department of Economics, University of Abuja, Nigeria.)

  • Nwaogwugwu, Isaac

    (Department of Economics, University of Lagos, Lagos, Nigeria.)

  • Kelikume, Ikechukwu

    (Lagos Business School, Lagos, Nigeria.)

  • Dakare, Olamitunji

    (School of Management & Social Sciences, Pan-Atlantic University, Lagos, Nigeria.)

  • Oke, Olubode

    (Department of Accounting, Nassarawa State University, Keffi, Nigeria)

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.

Suggested Citation

  • Evans, Olaniyi & Adeniji, Sesan & Nwaogwugwu, Isaac & Kelikume, Ikechukwu & Dakare, Olamitunji & Oke, Olubode, 2018. "The relative effect of monetary and fiscal policy on economic development in Africa: a GMM approach to the St. Louis equation," BizEcons Quarterly, Strides Educational Foundation, vol. 2, pages 3-23.
    • Handle: RePEc:ris:buecqu:0003
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    Citations

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    Cited by:

    1. O. Evans, 2019. "Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?," Journal of African Business, Taylor & Francis Journals, vol. 20(3), pages 392-406, July.
    2. Manning, Stephan & Vavilov, Stanislav, 2023. "Global development agenda meets local opportunities: The rise of development-focused entrepreneurship support," Research Policy, Elsevier, vol. 52(7).
    3. Obaid, Shahid & Baig, Mirza Aqeel & Shah, Muzafar Ali, 2020. "Determining inflation as monetary or fiscal phenomenon: An empirical evidence from South Asia," BizEcons Quarterly, Strides Educational Foundation, vol. 6, pages 22-48.
    4. Cemal Ozturk & Gunsenin Altinkaynak, 2022. "Asymmetric Effectiveness of Monetary and Fiscal Policies: Evidence from Turkey," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 8(1), pages 1-14, June.
    5. Evans, Olaniyi, 2022. "The criticality of institutions and the macroeconomy for education outcomes in Africa," MPRA Paper 118197, University Library of Munich, Germany.
    6. Are, Olasubomi, 2019. "Currency Devaluation and Trade Balance Nexus: A Test of Marshall-Lerner Condition in Nigeria," BizEcons Quarterly, Strides Educational Foundation, vol. 4, pages 23-43.
    7. Ogechi Adeola & Olaniyi Evans, 2020. "ICT, infrastructure, and tourism development in Africa," Tourism Economics, , vol. 26(1), pages 97-114, February.
    8. Maxwell Kongkuah & Hongxing Yao & Veli Yilanci, 2022. "The relationship between energy consumption, economic growth, and CO2 emissions in China: the role of urbanisation and international trade," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(4), pages 4684-4708, April.
    9. Adeola, Ogechi & Evans, Olaniyi & Hilson, Ebo, 2018. "Tourism and economic wellbeing in Africa," MPRA Paper 93685, University Library of Munich, Germany.
    10. Evans, Olaniyi, 2021. "The Curious Case of Petro-Monetary Transmission Mechanism in Oil-Producing Countries: An Analysis of the Effect of Oil Price on Inflation in Nigeria," MPRA Paper 118198, University Library of Munich, Germany.
    11. Evans, Olaniyi, 2018. "Digital Government: ICT and Public Sector Management in Africa," MPRA Paper 91628, University Library of Munich, Germany.

    More about this item

    Keywords

    Monetary policy; Fiscal policy; Economic development; GMM; St Louis equation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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