Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200105
Authors: 
Ng'ang'a, William Irungu
Chevallier, Julien
Ndiritu, Simon Wagura
Year of Publication: 
2019
Series/Report no.: 
Economics Discussion Papers No. 2019-40
Abstract: 
This study explored the nature of fiscal and monetary policy coordination and its impact on long-run sustainability in Kenya. The study employed annual time series data from 1963 to 2014. Two objectives were investigated. (i) The determinants ofmonetary and fiscal policy rules under different policy regimes. (ii) The nature of fiscal and monetary policy regimes coordination in Kenya. Markov switching models were used to determine fiscal and monetary policy regimes endogenously. The fiscal policy regime was regarded as passive if the coefficient of debt in the MS model was significant and negative. This fiscal policy regime is regarded as unsustainable since the rise in debt is associated with a deterioration of the fiscal balance. On the other hand, the active monetary policy is synonymous with contractionary monetary policy since real in interest rate reacts positively to an increase in inflation. Robust analysis conducted using self-exciting threshold models confirms that monetary and fiscal policy reaction functions are nonlinear. The study findings show that passive or unsustainable fiscal regime was more dominant over the study period. There is evidence to support coordination between fiscal and monetary policy. There is a tendency for monetary policy to actively and prudently respond to unsustainable fiscal policy. Secondly, monetary policy sequentially responds to fiscal policy. The study recommended the adoption of systematic monetary response to a periodic deviation of fiscal policy from a long-run sustainability path.
Subjects: 
policy regimes
fiscal and monetary policy management
Markov-switching
SETAR
JEL: 
E62
F30
H61
Creative Commons License: 
https://creativecommons.org/licenses/by/4.0/
Document Type: 
Working Paper

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