An Analysis of the Relative Effectiveness of Monetary and Fiscal Policies on Economic Performance in Five CARICOM Member States: Barbados, Belize, Guyana, Jamaica and Trinidad and Tobago

The major macroeconomic goals are to boost output and employment levels and maintaining price stability. Two mainstream polices tasked with regulating the economy to achieve these multiple goals are monetary and fiscal policies. These policies use different instruments to influence the attainment of the objectives and their impacts differ in magnitude and duration. According to monetarists, the impact of monetary policy outweighs that of fiscal policy; while Keynesians posit that fiscal policy measures are critical for the stimulation of growth. Through these policies, countries try to map a sustainable and inclusive economic growth path. However, low economic growth rates in these countries have become a growing concern with policy prescriptions. Theoretical and empirical research on the relative power of monetary and fiscal policy to affect economic growth is inconclusive.

In this paper, the relative effectiveness of monetary and fiscal policies in stimulating real output in five Caricom member states is investigated, using a modified St. Louis equation within a vector auto-regression framework. In four of the five countries, real money supply affected RGDP negatively, with the exception of Trinidad and Tobago.

The contribution of expenditure to national income was negative in Barbados, Belize and Trinidad and Tobago, but positive for Guyana and Jamaica.