The impact of fiscal and monetary policies on nominal income in Bangladesh

Abstract

The impact of the growth of fiscal and monetary policy variables on nominal GDP growth is examined. Two measures on the fiscal policy side, government expenditure and total tax revenue, and on the monetary policy side, monetary aggregate measures M1 and M2, are selected as explanatory variables. Growth rate of M1 is found to have a statistically significant impact on nominal GDP growth. On the fiscal policy side, the growth rate of the tax revenue is found to have some lagged effect on nominal income. Government expenditure and M2 growth do not have any statistically significant impact on nominal GDP growth. With respect to the cumulative effect, M1 is found to be a statistically significant variable affecting nominal GDP growth. Co-integration analysis shows that there is a long-run equilibrium relationship between M1 and nominal GDP growth. The findings of the study support the monetarists’ claim that growth in money supply has a statistically significant impact on nominal income growth.

JEL classification: E52, E62