An Empirical Investigation Of The Stabilisation Potency Of Budgetary And Financial Policy Instruments In Sierra Leone

This study aims at determining the effect of government expenditure on real output, the effectrnof budget deficit and domestic credit on inflation and the balance-of-payments and the effectrnof exchange rate depreciation on the balance of payment, inflation and real output.rntime series models of inflation, balance of payments and real output have been estimated asrnthese are the key variables targeted by stabilization programs, which involve budgetary andrnfinancial policy instruments. The procedure used involves applying the Johansen MaximumrnLikelihood Method ill multivariate models and the hendry’s general-to-Specific Method tornarrive at long- and short-run models, respectively.rnFiscal restraint is found to abate inflation and improve the balance of payments but it isrnaccompanied by real output loss. Budget deficit is found to Granger cause domestic credit andrnthe process through which the domestic credit creation worsens the balance of payments isrnthrough its injlatiol1Cl1Y effect. Thereby dwindling the competitiveness of the Sierra Leonerneconomy. Exchange rate depreciation is found to improve the balance of payments in the longrnrun. It is however inflationary and it reduces real output in the short run though expansionaryrnin the long run.

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