The Effects of Fiscal and Monetary Policy on Inflation in Lebanon

EasyChair Preprint 3205, version 1

Abstract

The main objective of this research is to study the effects of fiscal and monetary policy on inflation and examine the effectiveness of Lebanese monetary and fiscal policy to control inflation between 1978-2019 using an autoregressive distributed lag (ARDL) cointegration technique (ARDL) developed by Pesaran et al. (2001) as well as Granger no-causality approach developed by Toda and Yamamoto (1995) in a two-variable vector autoregression model to explore the direction of causation among the variables of our model.

Based on the empirical study, we found that:

• Lebanese economy is very dependent on the imported inflation through the channel of imports.
• Lebanese fiscal policy has an inflationary effect, due to the weakness of productive sectors of the Lebanese economy.
• Lebanese Monetary policy needs at least 3 years to achieve an influence on the inflation rate.
• The inflation rate in Lebanon is caused by the money supply passing through the velocity of money; it means that monetary policy is ineffective if it is not accompanied by an acceleration of the velocity of money, which plays mediating role (or transmission channel) between the monetary policy and the real economy.

Our research highlights the importance of the velocity of money in the process of inflation and warns against the risks of giving this variable a secondary role (assumed constant according to the quantitative theory of money) as in most macroeconomic models.

Keyphrases: Inflation, fiscal policy, monetary policy, money supply, velocity of money

@booklet{EasyChair:3205,
  author    = {Mahmoud Hachem},
  title     = {The Effects of Fiscal and Monetary Policy on Inflation in Lebanon},
  howpublished = {EasyChair Preprint 3205},
  year      = {EasyChair, 2020}}