Abstract:
This study focuses on the dynamic relationship between fiscal and monetary policy in the context of Rwanda economic. The research objectives include to investigate the coordination of both fiscal and monetary policy on Rwandan economy, to assess the impact of change in government spending on inflation and economic stability in Rwanda, to examine the relationship between fiscal stimulus packages and monetary policy adjustment during economic crises, with a focus on their impact on GDP growth. The government spending was used as the indicator of fiscal policy while central bank rate was used as indicator of monetary policy. To achieve these goals, a Bayesian Vector Autoregressive (BVAR) model is employed, with an emphasis on selecting the optimal lag order using various information criteria. The study unveils a series of insightful analyses, using graphical representations and historical decompositions, to shed light on the interplay between key economic variables such as Real Gross Domestic Product (RGDP), Core Inflation, Central Bank Rate (CBR), and Government Spending (GOV). The findings emphasize the influential role central bank rate on Inflation, the strong connection between government spending and RGDP, and the necessity of coordinating fiscal and monetary policies in shaping policy dynamics. Furthermore, the study delves into the robustness of the VAR model, highlighting its reliability and resilience under different conditions. The model's performance in forecasting, handling structural shifts, and addressing outliers is rigorously examined through sensitivity analysis, confirming its value as a dependable tool for empirical research. This research enhances our understanding of the dynamic relationship between fiscal and monetary policy, revealing the inherent challenges and implications of this intricate interplay. The insights gained from this study are valuable not only to policymakers but also to researchers, providing them with the knowledge required to develop informed policies and strategies aimed at promoting economic stability and sustainable growth.
