THE SECTORAL IMPACT OF MONETARY AND FISCAL POLICY (CONSUMPTION, INVESTMENT, VECTOR-AUTOREGRESSION)

In recent years, the macroeconomic effects of monetary and fiscal policy variables have been widely debated in the literature. However, even though the literature on policy effects for the economy as a whole has grown quite large, the sectoral impacts associated with various monetary and fiscal policies have received little attention. In this dissertation, the sectoral impact of monetary and fiscal policy actions are estimated. The sectors are classified on the basis of the following components of the national income accounts: consumer expenditures on durables, non-durables and services and investment expenditures on residential and non-residential structures. M1 and M2 are used as the relevant monetary policy variable and high employment expenditures as the relevant fiscal policy variable.

Trivariate vector autoregressive models are initially estimated, each consisting of one of the five types of expenditures and a monetary and a fiscal policy variable. The implications of the trivariate models are, in general, consistent with the findings of Simpson and Meiselman (1971). It is then checked to see whether or not the conclusions based on the trivariate models are overturned by expanding the analysis to include an interest rate, a fourth variable. Both short-term and long-term interest rates are used. It is found that some of the results change due to the introduction of the interest rate.

The most important conclusions derived from this study can be summarized as follows: (i) A shock to a monetary policy variable has a greater impact, both in magnitude and durability, on different types of expenditures than a shock to a fiscal policy variable. (ii) The magnitude and timing of the effect of changes in policy variables on different type of expenditures depend on the nature of the durability of a product. The more durable is the class of expenditures, shorter is the lag.