Article

 

The effectiveness of fiscal and monetary policy during the financial crisis (p.53-66)

by

Besnik Fetai, SEE UNIVERSITY, ILINDENSKA BB, TETOVO, FYROM

Keywords : Output Loss, Financial Crisis, Fiscal Policy, Monetary Policy

JEL classification : E52, E62, G15

Abstract

The objective of this paper is to assess the effectiveness of monetary and fiscal policy on economic growth during the financial crisis in developing and emerging countries. Applying the dataset provided by Leaven and Valencia (2008 and 2010), I examine 83 financial crisis episodes in 66 developing and emerging countries. Employing the method utilized by Gupta at al., (2007), Baldacci at al., (2009), Hutchison (2010) and Li and Tang (2010), I performed the monetary and fiscal variables in order to control various determinants of output cost during the financial crisis. Applying different techniques OLS with robust standard errors and GMM estimator, I find out that monetary and fiscal policy contractions are associated with an increase of the output cost during the financial crisis. In addition, fiscal policy expansion is accompanied with smaller output cost over the financial crisis, whereas monetary expansion has no showed a clear effect. The macroeconomic policy mix with a discretionary fiscal expansion and a neutral monetary policy are likely to mitigate output cost during the financial crisis in developing and emerging countries.