The degree of responsiveness of fiscal and monetary policy in Sierra Leone

Abstract

Purpose

The degree of responsiveness of fiscal and monetary policy mechanisms that promote growth and development in Sierra Leone is the subject of this article.

Design/methodology/approach

This article uses both the Auto Regressive Distributed Lag (ARDL) model presented by Hashem and Yongcheol (1998) and the Non-Linear Auto Regressive Distributed Lag (NARDL) model by Shin et al. (2014) to analyze annual time-series data in evaluating the asymmetric effect of real gross domestic product (RGDP), inflation, government expenditure and money supply using annual time-series data for 40 observations over the period 1980–2019.

Findings

The augmented Dickey–Fuller unit root test shows that money supply, government spending and consumer price index are integrated at first difference I (1), while RGDP is stationary at level I (0). The results of the NARDL cointegration test indicate that the variables are cointegrated. The study shows that government expenditure is a positive function of both positive and negative changes. Hence, both positive and negative cumulative sum government expenditures improve economic growth but show a relative weak asymmetric effect with the regressand. This study also reveals that inflation is a negative function of both positive and negative changes with asymmetric effect with the dependent variable. This study shows that the positive change of money supply is statistically insignificant in boosting economic growth, while the negative change positively improves economic growth. Conclusively, this article shows that fiscal policy has a greater and more responsive than monetary policy in promoting growth and development in Sierra Leone. The result of the error correction term of the NARDL model shows a high spend of adjustment of 135% from any disequilibrium of GDP imbalance in the economy.

Originality/value

To address the problem of fiscal dominance in Sierra Leone, this study recommends that fiscal and monetary policies should be coordinated simultaneously and to an appropriate extent to achieve the desired outcome in growth and development.

Citation

Turay, A., Seraj, M. and Özdeşer, H. (2023), "The degree of responsiveness of fiscal and monetary policy in Sierra Leone", African Journal of Economic and Management Studies, Vol. 14 No. 1, pp. 18-33. https://doi.org/10.1108/AJEMS-08-2021-0387