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The effect of active and passive policy rules on economic growth

  • Khalid, Norlin
Publication Date
Jan 01, 2013
OpenGrey Repository


This thesis is comprised of three chapters on active and passive regime policy rules. The policy makers commit to simple rules in which the monetary authority follows an interest rate targeting rule while the fiscal authority follows a debt targeting rule. The first chapter determines how the conduct of fiscal policy rules interacts with optimal monetary policy rules in affecting the equilibrium determinacy when moving from continuous to discrete time. It is shown that, the local determinacy of an equilibrium path is determinate under the 'active monetary/passive fiscal' regime, while the examination of other regimes shows the indeterminacy results. These findings are in stark contrast with the case ofthe continuous time model, suggesting that the timing assumptions play an important role in determining local equilibrium. The second chapter extends the first chapter by introducing endogenous growth in line with Romer (1986)'s model of capital externality and learning-by-doing. This chapter shows that, the dynamic property of the economy around the balanced growth path is highly sensitive to the degree of externalities and price stickiness. The final chapter is an empirical work that examines the relative effect of policy regimes on long-run economic growth for a set of South- East Asian countries, namely Malaysia, Thailand and Singapore from 1971 to 2009. The Markov-switching regressions show that there exist regime switching changes in policy rules for Singapore and Thailand throughout the period covered. On the other hand, monetary policy regimes in Malaysia were characterized as passive while the fiscal regimes were active at all times. Furthermore, the Autoregressive Distributed Lag cointegration shows that in the long-run, the regime of monetary rule is important in determining the output growth in Thailand. However, the characterizations of policy rules whether 'active' or 'passive' does not really matter for economic growth in Singapore. / EThOS - Electronic Theses Online Service / GB / United Kingdom

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