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Essays in monetary and fiscal policy
Thesis (PhD (Economics))--University of Pretoria, 2014.
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2026
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| access_status_str | Open Access |
| author2 | Naraidoo, Ruthira |
| author_browse | Naraidoo, Ruthira |
| author_facet | Naraidoo, Ruthira |
| collection | Thesis |
| description | Thesis (PhD (Economics))--University of Pretoria, 2014. |
| format | Thesis |
| id | oai:repository.up.ac.za:2263/110185 |
| institution | University of Pretoria (South Africa) |
| language | English |
| last_indexed | 2026-06-10T12:38:17.431Z |
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| provenance_str_mv | Harvested via OAI-PMH from UPSpace — University of Pretoria Institutional Repository |
| publishDate | 2026 |
| publishDateRange | 2026 |
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| source_str | UPSpace — University of Pretoria Institutional Repository |
| spelling | oai:repository.up.ac.za:2263/110185 Essays in monetary and fiscal policy Naraidoo, Ruthira claban_2010@yahoo.com Gupta, Rangan Chesang, Laban Kiptui Thesis (PhD (Economics))--University of Pretoria, 2014. This thesis analyzes important monetary and fiscal policy issues in applied/empirical macroeconomics. The study is motivated by the events surrounding the recent 2007-08 global financial crisis and the desire of policymakers the world over to stabilize the economy through appropriate monetary and/or fiscal policy. The crisis has left many nations vulnerable to economic uncertainty, which has hindered economic growth. It is often the belief that, for government to recover from such crisis, it would tighten its monetary and/or fiscal policies. However, recovery is usually slow because the crisis increases economic policy uncertainty which policymakers often are unequipped to deal with or respond to poorly. In view of this, this study is relevant for policymakers in terms of improving their understanding of the behaviour of important macroeconomic variables and their implications for monetary and/or fiscal policy decision making. The thesis consists of three independent chapters besides the introduction and conclusion, and it is structured in two main parts. The first part includes chapters two and three, and it focuses on monetary policy. In chapter two, we addresses the issue of whether or not the transmission of bank lending shocks and the dampening thereof by monetary policy depend on the state of the banking sector. Chapter three examines the likely impact of uncertainty in the output-inflation trade-off on inflation using a monetary model in which central bank preferences are asymmetric over inflation and output. Fiscal policy issues are analyzed in the second part (chapter four), in which we use a dynamic stochastic general equilibrium (DSGE) model to analyze the macroeconomic impact of fiscal stimulus. We subsequently present a brief summary of each chapter. Chapter two investigates the hypothesis of nonlinear interactions between bank lending, volatility and monetary policy while taking into account the state of the banking sector, with the view of vi i assessing the role of the banking sector in business cycle dynamics. This is done by employing a Markov switching structural Bayesian vector autoregression (MS SBVAR) model along the lines of Sims and Zha (2006) and Sims, Waggoner and Zha (2008) on South Africa_s monthly data for the period 1966:M4 to 2011:M12. The model allows for time varying parameters in monetary policy and volatilities in bank lending shocks. We identify a number of episodes with high volatility in bank lending, and show that these episodes have corresponded to different monetary policy responses. Specifically, it is revealed that, regimes corresponding to high volatility in bank lending are associated with a monetary policy regime that is less aggressive to inflation but more responsive to output and bank lending. Loan supply shocks are found to have real effects in the economy. We also find evidence indicating that loan supply shocks and aggregate demand shocks, which generate inflationary pressures, account for a huge contribution in fluctuations in bank lending. This chapter underscores the role of the SARB in maintaining not only price stability, but also timely regulations of the financial system in general, in order to reduce episodes of volatile financial system. Chapter three examines the implications of uncertainty in the output-inflation trade-off for inflation dynamics, using a monetary model which features central bank asymmetric preferences over inflation and output. The uncertainty is modelled by exploiting the Lucas_ (1973) signal extraction model, in which the slope of the Phillips curve depends on the volatility of monetary policy. The task undertaken in the chapter is to solve under discretion for the reduced form process for inflation from the central bank_s optimization problem while taking into account the uncertainty about the slope of the Phillips curve. The focus is on the model with asymmetric preference although we begin initially with the model with quadratic preferences over inflation vi ii and output. Empirical estimation is implemented using Maximum Likelihood on South African data, for several variants of the model describing inflation behaviour. Our results show that in general, the models with uncertainty dominate those with certainty equivalence in terms of overall goodness of fit, implying that uncertainty about the trade-off adds significant information that helps policymakers interpret inflation. It is revealed that the implication of uncertainty about the trade-off is two-fold: firstly, it causes the interaction of output and volatility of monetary policy to influence inflation movements: in which case, we find significant evidence suggesting that higher volatility in monetary policy causes inflation to rise. Secondly, as suggested in an optimal rule, it causes output to contract by less whenever inflation increases above the target, and to expand by less whenever inflation is below the target. Other results indicate that the data seems to favour the model with asymmetric preferences to inflation only, relative to the one with asymmetric aversion to both inflation and output. This perhaps emphasizes SARB_s primary role of maintaining price stability. Moreover there is evidence suggesting that central bank seems to penalize more for inflationary rather than deflationary pressures. Overall, our findings appear to show that while SARB_s preferences are in line with her main role of maintaining price stability, the bank_s deflationary bias would allow for a relatively flat output-inflation trade-off. In turn, this would be helpful for economic stability. The subject matter investigated in the second part of the thesis concerns the role of fiscal stimulus in the economy. During crisis periods governments announce major stimulus packages designed to stimulate a weak macroeconomic environment. The use of fiscal policy to stabilize the economy can be justified on two grounds: first, at the zero-lower bound, interest rate adjustment becomes ineffective (Spilimbergo, 2008; Feldstein, 2009; and Christiano et al., 2011); and secondly, with a large share of agents in the economy being credit constrained, fiscal stimulus can induce ix expansionary effects by raising their current incomes (Furlanetto, 2010). In view of this, in chapter four, we employ the New Keynesian dynamic stochastic general equilibrium (DSGE) model to analyze the macroeconomic implications of fiscal stimulus. The objective is to replicate the standard results in the literature for broad or general government spending and contrast them with that of targeted spending, via wage subsidy granted to domestic firms. The model features credit constrained consumers and wage rigidity in the labour market. Our results indicate that contrary to broad government spending which induces a negative wealth effect on Ricardian consumers, a novel channel is established through which targeted spending viz-á-viz wage subsidy raises consumption of both Ricardian and non-Ricardian consumers. Consequently, wage subsidy generates a larger increase in aggregate consumption than pure demand stimulus. Furthermore, unlike broad government spending which in inflationary, wage subsidy operates directly through an additional supply side channel which alters relative factor prices, causing firms_ marginal cost and consequently inflation to fall. Overall the study demonstrates the role of wage subsidies in stimulating consumption, output and job creation in the economy. The relevance of this chapter lies in its contribution to the policy debate on the potential gains of a wage subsidy program that is soon to be implemented in South Africa and other developing countries. Economics PhD (Economics) 2026-05-15T17:26:35Z 2026-05-15T17:26:35Z 14/12/10 2014 Thesis http://hdl.handle.net/2263/110185 en application/pdf |
| spellingShingle | Essays in monetary and fiscal policy |
| title | Essays in monetary and fiscal policy |
| title_full | Essays in monetary and fiscal policy |
| title_fullStr | Essays in monetary and fiscal policy |
| title_full_unstemmed | Essays in monetary and fiscal policy |
| title_short | Essays in monetary and fiscal policy |
| title_sort | essays in monetary and fiscal policy |
| url | http://hdl.handle.net/2263/110185 |