An empirical analysis of the efficacy of fiscal and monetary policies in fostering job creation among emerging economies: panel ARDL approach.

Abstract

Emerging economies continue to experience secular stagnation marked by high unemployment. The arrival of Covid-19 has taken some of these nations to the brink of collapse. While this unemployment has been caused by numerous factors and potential consequences, such as poverty, increased insecurity evokes a worrying future. A large variety of issues may occur if unemployment continues to rise which impels job creation policies to prevent such rising. The study investigates whether governments could look to repurpose the fiscal policy to encourage job creation among 11 selected emerging economies for the period 1997 to 2020. Moreover, the central bank can boost the economy by using the monetary policy combined with the fiscal policy as potential tools for job creation. Unemployment is a proxy for job creation, while government expenditure, the real interest rate, and money supply represent fiscal and monetary policies respectively. Inflation has been included in the model. This relationship is examined using a panel autoregressive distributed lags (ARDL) model. Prior to this, the pooled ordinary least squares (OLS), fixed effect, and random effect models have been employed as a necessity for panel data estimation. A Hausman test provided guidance for the use of a random effect model that indicates government expenditure has a positive relationship with unemployment. The same relationship is seen in the ARDL model where an increase in government expenditure leads to an increase in unemployment, holding all other variables constant. Fiscal policy, therefore, does not foster job creation in emerging economies. The monetary policy shows more promise as money supply in a previous time period and the real interest rate in a previous time period and long run have a negative and positive relationship respectively. Money supply increases lead to a decrease in unemployment, while real interest rate decreases also decrease unemployment. This indicates that an expansionary monetary policy encourages employment in these periods despite obtaining opposite results with present short run results. The inflation rate has a positive relationship with unemployment which is contrary to the Phillips curve hypothesis of an inverse relationship. The study recommends that governments focus on investment and infrastructure expenditures, which have a better track record of promoting job growth. With the interest rate showing the potential to induce employment, monetary policies should take on the additional mandate.