Discussion Paper
No. 2019-40 | June 27, 2019
William Irungu Ng’ang’a, Julien Chevallier and Simon Wagura Ndiritu
Investigating fiscal and monetary policies coordination and public debt in Kenya: evidence from regime-switching and self-exciting threshold autoregressive models

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 of monetary 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.

Data Set

JEL Classification:

E62, F30, H61

Cite As

William Irungu Ng’ang’a, Julien Chevallier, and Simon Wagura Ndiritu (2019). Investigating fiscal and monetary policies coordination and public debt in Kenya: evidence from regime-switching and self-exciting threshold autoregressive models. Economics Discussion Papers, No 2019-40, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-40


Comments and Questions



Anonymous - Question on central bank in the local context
June 30, 2019 - 17:55
I find this paper very interesting, clear and overall i think we need more policy oriented studies on the African context such like this one. I will ask one question to the authors if possible: How monetary policy and fiscal policy can independently pursuing effective policies in this local context where the central bank is not independant? Perhaps, it has operational independence, but in time of trouble, governments will surely take back control of the monetary policy, which might not be good news as not independant central banks are generally associated with higher level of inflation and perhaps with lower economic growth. Thank you.

William Irungu - Reply - Question on central bank in the local context
July 05, 2019 - 12:06
Highly appreciate the above remarks! Indeed, while acknowledging the merits of having an independent central bank - a concept which most African economies struggle with given the reasons you mentioned, this study echoes the sentiments of the Fiscal Theory of Price level (FTPL), by demonstrating how both the fiscal and monetary agents ought not to operate in silos but instead need to ensure their respective policies are in tandem to guarantee a non-explosive public debt path, price stability and a sustainable economic growth path. Best Regards,William Nganga.

Anonymous - Referee Report 1
July 22, 2019 - 09:14
see attached file
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Anonymous - Referee Report 2
July 24, 2019 - 08:26
see attached file
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Anonymous - Relate your contributions with those of previous papers using different methodologies.
August 05, 2019 - 14:24
I am of the opinion that this paper addresses a relevant issue concerning public policy in Kenya using an innovative approach. I deem that the paper has been clearly written with potential contributions and can be accepted for publication. However, authors should consider contrasting the contributions of this paper with those of previous papers using other methodologies. This would better project the advantages of regime switching frameworks over single regime models.

Anonymous - Letter by way of reply to the Referee Reports - Invitation to revise manuscript MS 3202
August 15, 2019 - 11:31
We highly appreciate the insightful comments and suggestions from the two reviewers. Please see attached reaction to the two referee reports. With regards.
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Anonymous - Link implications of the findings with theoretical literature
August 24, 2019 - 00:52
This paper is well written and well motivated and I would recommend it for publication. However, I would want to make the following suggestion. It would be interesting if the authors could link the implications of the findings with theoretical literature, with particular reference to sequential-move games approach to policy coordination.

Anonymous - explain why using this econometric model is relevant.
September 15, 2019 - 21:08
In my view, the paper deals with an important issue; we don’t have enough papers studying fiscal and monetary policies coordination on sub-Saharan Africa. In addition, the paper is well written and very clear, I would recommend it for publication. From my point of view, a Markov-switching model is interesting to study this issue, however, the authors should further explain why using this econometric model is relevant.