Analysis of the relationship between fiscal and monetary policies and the absorptive capacity of the economy Experiences of selected countries with reference to Iraq
A Dissertation Submitted to the council of the college of Administration and Economics – University of Karbala in partial of the requirements for the degree of Doctor of philosophy in Economic Sciences
Submitted by
Marwan Shaker Obaid Al-Zarkani
Supervisor
Asst.Prof.Dr. Sarmad Abdul Jabbar Haddab Al Khairallah
Asst.Prof.Dr. Zeinab Hadi Neama Al-Khafaji
Abstract
Fiscal and monetary policies are the two main pillars for the success of the macroeconomic policy in any country, especially the sample countries. Through these two policies, structural imbalances in the economy are addressed and the country’s productive capacities are raised. The extent of the success of these policies in achieving their goals depends on the extent of coordination between them and the degree of their effectiveness. Given the circumstances, the sample countries adopted a set of goals that suit the nature of the stage their economies went through.
The research aimed to measure and analyze the effects of fiscal and monetary policies on absorptive capacity in Iraq and the sample countries (Saudi Arabia, Algeria) for the period (2004-2022) through monetary indicators, including money supply, exchange rate, and interest rate. As for financial indicators, they may be represented by public expenditures and revenues and total debt, in order to test the effectiveness of the two policies in developing the absorptive capacity of the economies concerned. We targeted the following absorptive capacity indicators (investment, savings, and the productive capacity index), This was done according to the methodology of the Autoregressive Distributed Lag (ARDL) model, in addition to identifying the short- and long-term equilibrium relationships, so that economic decision-makers can take the steps that should be taken to create financial and monetary effects to transfer those effects to the indicators of absorptive capacity in order to advance the economies of the sample countries.
The research hypothesis came to note the existence of a weakness in the relationship between monetary and fiscal policies and absorptive capacity, as the effectiveness of monetary and fiscal policies does not respond to the conditions or circumstances of the economy’s absorptive capacity, due to the economic and non-economic problems and restrictions that each of them suffers from. While the research problem came at the level of the countries of the sample studied (Saudi Arabia, Algeria and Iraq), is there a relationship of influence between the indicators of monetary and fiscal policies and indicators of the economy’s absorptive capacity?
The results of the standard aspect showed that fiscal policy was more effective than monetary policy in influencing indicators of the economy’s absorptive capacity in all economies of the sample countries, which places us before a decision on the necessity of activating the role of monetary policy in this aspect.
In light of the above, the research presented a set of recommendations that have important effects on the research topic, most notably the necessity of directing investments towards productive sectors that support the economic development process. These investments can be directed towards the industrial and agricultural sectors, especially since these sectors suffer from aggravation and technological decline due to the economic crises that the country has witnessed, which have kept these sectors weak and far from keeping pace with global economic developments. This step is necessary to revive the absorptive capacity in the Iraqi economic environment.
