Economic policy for sustainable development: role of monetary policy, fiscal policy and regulatory policy

This study empirically examines the effect of economic policy on sustainable development using annual data for 22 countries from 2011 to 2018. The study also proffers some economic policy strategies for increasing the level of sustainable development. In the empirical analysis, a sustainable development index was constructed comprising of SDG proxy indicators: healthcare expenditures to GDP ratio (SDG3), percentage of people using safely managed drinking water services (SDG6) and the share of renewable energy to final total energy consumption (SDG7). The results show that the economic policy index has a significant positive effect on the sustainable development index particularly in non-European countries and in developing countries and a negative effect in European countries and developed countries. Changes in monetary policy, fiscal policy and regulatory policy have a significant impact on the level of sustainable development. Expansionary monetary policy via increase in broad money to GDP ratio increases the attainment of SDG6 while contractionary monetary policy via increase in central bank interest rate increases the attainment of SDG7. Expansionary fiscal policy via increase in consumer spending leads to the attainment of SDG3 and SDG7 but it adversely affects the attainment of SDG6. Effective regulatory policy via increase in institutional governance quality increases the attainment of SDG3 and SDG6. There is uni-directional causality between economic policy and sustainable development. Monetary policy and regulatory policy also have a uni-directional relationship with sustainable development, implying that changes in monetary and regulatory policies cause changes in the level of sustainable development. This study is the first to empirically examine the contribution of economic policy to sustainable development using composite indices.