Training course outline


Seminar on Economic Growth, Creation and Macroeconomic Policy

JANUARY27–28, 2011

Is Discretionary Monetary Policy Effective? The

Carribbean Experience

Succeed F. Bangwayo-Skeete

Paper presented at the Choices for the Caribbean Following the Global Financial Crisis Meeting Bridgetown, Barbados─January 27–28, 2011

Organized by the University of the West Indies, the Central Bank of Barbados, plus the International Financial Fund

The views stated in this paper are those of the author(s) only, and the presence of these, or of links to them, around the IMF internet site does not imply that the IMF, its Professional Board, or its management endorses or shares the views stated in the daily news.

Is discretionary fiscal coverage effective? The Caribbean encounter Prosper Farreneheit. Bangwayo-Skeete


Governments' option to money policy to mitigate the effects of the the latest global overall economy has reconditioned interest on the role of fiscal coverage on impacting on economic activity. Understanding the efficiency of financial policy to economic activity aids policymakers spending decisions. Accordingly, this kind of paper analyzes the economic effects of discretionary fiscal coverage (i. elizabeth. increases in government costs and duty cuts) inside the Caribbean – Barbados, Discovery bay, jamaica and Trinidad and Tobago. Using strength vector autoregressive and strength vector mistake correction versions, the quotes show that government spending policies can stimulate the economy of Jamaica and Trinidad and Tobago but not of Barbados. Discretionary tax plans are found appealing in combining fiscal balances.

Keywords: financial shocks, Carribbean, structural vector autoregressive models; structural vector error a static correction models

International College of the Cayman Islands, Cayman Islands

Email: prosper. [email protected] com;

[email protected] com

Tel: 1(345) 517 2874

Address: P. U Box 530; KY1-1502; Grand Cayman; Cayman Islands

1 . Introduction

The 2008-2009 global recession wrecked chaos across the world like the Caribbean. The IMF (2010) reported that real outcome in the Caribbean contracted by simply 2 . 8 percent in comparison to 0. 6 percent, the global average last year. Across the place, however , there was diverse effects on output. Barbados' output fell by simply 0. 2% in 2008 and slumped by a additional 4. 4% in 2009. Discovery bay, jamaica recorded economical downturns of 0. 9% and installment payments on your 7% in 2008 and 2009 correspondingly. Trinidad and Tobago's economical growth decelerated in 2008 and declined by a few. 2% last season. Similar to OECD countries, the Caribbean economies responded simply by injecting significant discretionary financial stimulus deals in 2009 to dampen recessionary pressures and stimulate their particular economies. Whilst Jamaica's fiscal expansion centered on both broadening government spending and tax cuts, Barbados and Trinidad and Tobago responded through increasing authorities expenditure.

These kinds of recourse of governments to fiscal plan to mitigate the effects of a global economic crisis restored interest around the role of fiscal coverage on impacting on economic activity. Economic theory, however , is definitely not decisive on whether discretionary fiscal policy works well. The time-honored models think that the market program automatically changes to great moves up then terrible moves down. Therefore , they will presume not any role intended for fiscal coverage indicating it is ineffectiveness. Nevertheless , both neoclassical and neo-Keynesian models imply a positive effect of government investing in output; even if different mechanics. The neoclassical models commonly predict a bad effect on private consumption (see, e. g., Baxter and King (1993)), while neo-Keynesian models anticipate the opposite sign.

Akin to theory, the scientific literature provides no opinion on the size or even the sign of the effects of fiscal shock absorbers on outcome. The evidence is essentially based on two approaches:


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