Pakistan Institute of Development Economics



Whether Fiscal Stance or Monetary Policy is Effective for Economic Growth in Case of South Asian Countries?

Monetary policy and fiscal policy are sister strategies that can be used alone and in combination to direct the economic goals. In the literature relative efficacy of fiscal and monetary policy has been studied extensively. Friedman and Meiselman (1963), Ansari (1996), Reynolds (2000, 2001), Chari, et al. (1991, 1998), Schmitt and Uribe (2001a), Shapiro and Watson (1988), Blanchard and Perroti (1996), Christiano, et al. (1996), Chari and Kehoe (1998), Kim (1997), Chowdhury (1986, 1988), Chowdhury, et al. (1986), Weeks (1999), Feldstein (2002) and Cardia (1991) have examined the impact of fiscal and monetary policies on various economic aggregates. However, the bulk of theoretical and empirical research has not reached on conclusion concerning the relative power of fiscal and monetary policy to effect economic growth. Some researchers find support for the monetarist view, which suggests that monetary policy generally has a greater impact on economic growth and dominates fiscal policy in terms of its impact on investment and growth. [Friedman and Meiselman (1963); Ajaye (1974); Elliot (1975); Batten and Hafer (1983)], while other argued that fiscal stimulates are crucial for economic growth. [Chowdhury (1986); Olaloye and Ikhide (1995)], On the other hand, according to Cardia (1991) macroeconomic activities are largely explained by some other variables. The experiment of 1970s clearly demonstrates that a policy mix produced only stagflation. Some economist took keen interest in money by combining Keynesian neoclassical mixture which is called the “funnel” theory by James Tobin. The argument was that tax rate and money growth simultaneously leads to stagflation thus the Government could choose either fiscal or monetary policy stimulus which will enhance growth. [Reynolds (2001)].