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ABSTRACT-AN ASSESSMENT OF THE EFFECT OF THE MONETARY AND FISCAL POLICY ON THE ECONOMIC HEALTH OF SIERRA LEONE

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ABSTRACT OF THE PROPOSED AREA OF THESIS FOR THE MSC. IN
ECONOMICS.
TOPIC- ‘AN ASSESSMENT OF THE EFFECTS OF THE MONETARY
AND
FISCAL POLICIES ON THE ECONOMIC HEALTH OF SIERRA LEONE’
A BRIEF BACKGROUND TO THE STUDY
The aim of this empirical study is to explore the monetary and fiscal policy tools used
by government to achieve its macroeconomic objectives. All economies share three
main economic goals of growth, high employment and price stability. Fiscal policy
can promote macroeconomic stability by sustaining aggregate demand and private
sector incomes during an economic downturn and by moderating economic activity
during periods of strong growth.
Fiscal policy and monetary policy are the two tools used by the state to achieve
its macroeconomic objectives. While for many countries the main objective of fiscal
policy is to increase the aggregate output of the economy, the main objective of the
monetary policies is to control the interest and inflation rates. The IS/LM model is
one of the models used to depict the effect of policy interactions on aggregate output
and interest rates. The fiscal policies have a direct impact on the goods market and
the monetary policies have a direct impact on the asset markets; since the two
markets are connected to each other via the two macro variables output and interest
rates, the policies interact while influencing output and interest rates.
Monetary policy was carried out mainly through the use of direct instruments such as
reserve requirements, special deposit requirements, selective/qualitative credit
control and moral suasion. It sought to limit the growth of money and credit through
direct constraint on the growth of commercial bank’s balance sheets.
STATEMENT OF PROBLEM
Though most of the modern economists regard both fiscal and monetary policies as
important tools for stabilising the economy there is a group of economists known as
monetarists led by Friedman who think that changes in money supply are the key
determinants in the level of economic activity and the price level.
They contend that demand curve for money is quite steep and the investment
demand curve is quite elastic so that when there is a change in money supply, it
significantly affects the investment demand and therefore the equilibrium level of
nominal income.
In reviewing the economic outlook, the current and projected paths for fiscal policy
might affect key macroeconomic variables such as gross domestic product growth,
employment, and inflation. In this way, fiscal policy has an indirect effect on the
conduct of monetary policy through its influence on the aggregate economy and the
economic outlook. For example, if tax and spending programs are projected to boost
economic growth, the consolidated Reserve would assess how those programs
would affect its key macroeconomic objectives--maximum employment and price
stability--and make appropriate adjustments to its monetary policy tools.
RESEARCH QUESTIONS (OR OBJECTIVES)
The objective of this paper is to examine the relationship between monetary policy
and fiscal policy playing a key role in the economic growth in Sierra Leone. The
autoregressive distributed lag (ARDL) approach is applied using annual data over
the period 1970-2015. This paper makes an empirical contribution to existing
literature on Sierra Leone by employing a composite index of financial sector
development constructed by principal components analysis to establish the financegrowth relationship.
Thus, in the context of developing countries like Sierra Leone, the following
three are the important goals or objectives of monetary and fiscal policy:
(1) To ensure economic stability at full-employment or potential level of output;
(2) To achieve price stability by controlling inflation and deflation; and
(3) To promote and encourage economic growth in the economy.
METHODOLOGY (INCLUDING POPULATION, SAMPLE SELECTION,
INSTRUMENTS, PROCEDURE AND METHOD OF ANALYSIS)
In general, the preference for qualitative data was more evident with social than
environmental factors. This included the monitoring of outsourced value chain
activities. Most suggested quantitative data was suitable for assessing anticipated
sustainability impacts.
The research design and methodology shall specify the model estimated in order to
determine the various determinant of private investment in Sierra Leone for the
period under review, the priori expectation of the model specified, estimation
procedures and data source. The mathematical specification shall thus be as follows:
PINV= f(DCP, FOREXA, GINV, DSER, DEBT, PR, RGDP, INF, DEBT/ GDP)
In linear form:
PINV= Bo + b1 DCP + FOREXA + b3 GINV + b4 DSER + b5 RR, + b6 RGDP + b7
INF + b8 DEBT/ GDP
ESTIMATION TECHNIQUES
1. The F- Test
2. The T- Test
3. The DW- Statistics
4. Data Source
SIGNIFICANCE OF THE STUDY
Let me emphasize that fiscal stabilization and sustainability are in fact fully
compatible objectives. They are complementary aspects of a fiscal policy strategy
aimed at maintaining medium-term budgetary positions close to balance or in
surplus. Yet, with demographic and other structural changes negatively affecting the
structural budget position of countries, discretionary fiscal measures that restore the
longer term budgetary outlook are called for. The increase in aggregate demand
causes expansion in aggregate output, national income and employment.