Investigating the effects of monetary and fiscal policy on economic growth in ASEAN: A threshold modelling approach

Abstract

In the economic theory, many arguments from the different school of thoughts have been raised to justify the efficiency of economic policy in the view of stabilization. For instance, the correlation between macroeconomic variables and economic performance is a contentious issue. In this paper, we carefully examine and compare the impacts of fiscal (government expenditure) versus monetary policy (broad money and real interest rate) on economic growth using nonlinear regression. In particular, the main objectives include (1) to model the nonlinear threshold effect of broad money in modelling the economic growth by considering the 1997 Asian financial crisis influences and (2) to compare the impacts of both policies on economic growth. The study is based on a panel of ASEAN5 countries for the period of 1995-2015. Panel threshold regression established by Hansen (1999) was employed. The results reported a single threshold effect of broad money on inflation before and after controlling the crisis on determining economic growth. Here we observed that monetary policy through real interest rate caused to lower GDP growth while broad money led to the trade-off between inflation and growth. When broad money is high (above the threshold value), it led to higher economic growth but was compensated with the trade-off cost of higher inflation. Also, the Asian financial crisis caused to the significant drop in economic growth in ASEAN5. Overall, the study reported inefficient fiscal policy and monetary policy in the case of ASEAN countries.