Essays on the Macroeconomic Impact of Monetary Policy, Fiscal Policy and Financial Development: An Empirical Investigation

Abstract

This thesis includes three self-contained chapters using applied macroeconomics and focusing on the impact of monetary policy, fiscal policy and financial development on real economy in varied context. The first chapter investigates the monetary policy transmission mechanism and the extent to which exchange rate and oil price shocks exert pressure on macroeconomic variables in Bangladesh. Using a Vector Error Correction model, we find that monetary policy shocks have significant impact on inflation but not on output, while both interest rate and exchange rate channels play active roles in the determination of all other macroeconomic variables. Moreover, external shocks such as oil price and exchange rate shock are also important factors that influence domestic macroeconomic variables in Bangladesh. The second chapter examines the macroeconomic impact of fiscal policy in Euro-area countries under the same Monetary Union: Austria, Belgium, Finland, France, Germany, Ireland, Luxembourg, Netherlands, Portugal, Spain. Using structural VAR model framework, we show that a positive government spending shock has expansionary macroeconomic effects in Finland and France, a contractionary effect in Austria, Belgium, Germany, Netherlands, Portugal and Spain, but no significant effect is observed in Ireland and Luxembourg. Furthermore, a positive tax shock has a permanent recessionary effect in Belgium, Finland, France and Germany; a non-Keynesian effect in Luxembourg, Ireland, Netherlands and Portugal and almost unresponsive in Spain and Austria. Moreover, the estimated fiscal multipliers range between 0 to 1 on impact and negative for high debt countries. The signs of these multipliers also show a divide between countries, demonstrating both a Keynesian and non-Keynesian nature fiscal policy across these Monetary Union countries. The third chapter examines the nexus between financial development and economic growth in five countries: Australia, China, South Africa, the UK and the US. We find that in Australia and the US, only market-based financial intermediaries have significant long-run impacts on economic growth, while in China, South Africa and the UK both bank-based and market-based financial indicators have long-run impacts on economic growth. Moreover, in Australia and USA, the financial shock impact the economic growth through stock market only, whereas in South Africa its impact is through banks. However, in China and UK both the banks and stock market play an active role to transmit the shock of financial sector to real economy. Furthermore, we find that economic growth leads to both bank based and market based financial development in Australia, China and South Africa whereas it only leads to market based financial development in UK and USA.