Fiscal and monetary policy volatility and economic growth in low and middle-income countries

Abstract

The relationship between volatility and long-term growth has attracted considerable attention from researchers. This paper employs a regression model using data from the World Bank on low- and middle-income countries during the period 2000- 2019 to examine the effects of fiscal policy volatility, monetary policy volatility, and economic growth. The empirical results indicate that fiscal policy volatility is positively associated with economic growth, whereas monetary policy volatility has a negative impact. Notably, the relationship between volatility and growth is influenced by the size of government expenditure. When government spending is excessively large, the positive effect of volatility on growth is reversed. In addition, factors such as investment, human capital, and trade openness positively affect growth, while inflation and initial GDP have negative impacts. These findings imply that low- and middle-income countries need flexible fiscal and monetary policies alongside prudent government spending to promote high and sustainable economic growth.