Finance for Policymakers

Finance for Policymakers Mazen Chehimi Richard Beainy Affiliation: CIRAME Research Center, Business School, Holy Spirit University of Kaslik, P.O. Box 446, Jounieh, Lebanon Monetary policy, as the name implies is related with money supply. A Monetary Policy’s purpose is to influence the economy and is conducted by the Central (Federal) bank. Fiscal policy, as the name implies is related with tax Like the monetary policy, a Fiscal Policy’s purpose is to influence the economy as a whole and is conducted by the Government. The Quantity Theory of Money The quantity theory formalizes the relationship between money supply and the price level: 𝑀𝑉=𝑃𝑌 Where: 𝑀= Money supply 𝑉= Velocity of circulation 𝑃= Price level 𝑌= Real output Inflation is not quite popular, but expected inflation is much better than unexpected inflation The Fischer Effect One of the most important relationships in macro-finance is the Fischer Effect, which links nominal interest rates to real interest rates and expected inflation. The Fischer Equation: 𝑖=𝑟+𝜋𝑒 Where: 𝑖= nominal interest rate 𝑟= real interest rate 𝜋𝑒= expected inflation The Roles of the Central Bank The central bank is the monopoly supplier of currency. It acts as a banker to the government (and to other banks) and lender of last resort, it supervises other banks and manage the reserves of the country (Both foreign exchange and gold reserves). Finally, of course Central banks are usually responsible for conducting the monetary policy When the central bank believes that the current growth rate of economic activity will lead to inflation, it will look to reduce money supply and increase interest rates. Such actions are known as contractionary measures, as they are meant to rein in an overheating economy. When the central bank believes that the current level of economic growth is too slow and inflation is weakening, it will look to increase money supply and reduce interest rates. Such actions are known as expansionary measures, as they are meant to stimulate a receding economy. 1The Liquidity Trap When interest rates approach zero: People prefer liquidity (Cash) over bonds and Banks hesitate to lend (why bother if they would not realize profits) So Monetary policy loses effectiveness From the 1990s to early 2000s JAPAN was a real example of a liquidity trap. The Limits of Monetary policies Despite the theoretical power of the banking system to create money, several practical limits exist 2Risk Aversion in Banks During periods of uncertainty: Banks increases reserves, credit expansion slows and the multiplier collapses This occurred globally during the 2008 financial crisis and again during the early months of the COVID-19 pandemic. The Fiscal policy Money Printing to Pay Debt Risks of High Debt Result: Inflation! Taxes in a country can be either Direct or Indirect The Fiscal Multiplier The fiscal multiplier measures how government spending affects national income. Multiplier =1 1 − 𝑀𝑃𝐶(1 − 𝑡) Where: MPC = marginal propensity to consume t = tax rate Example: Government increases spending by 10 B$. MPC = 0.9, t = 0.2. Result: Multiplier =1 1 − 0.9(1 − 0.2) = 3.57 Total increase in income: 10 × 3.57 =35.7𝐵$ Challenges in Executing Fiscal Policy The Fiscal policy is a powerful tool but is constrained by practical issues: 1Time Lags Recognition lag, Action (decision) lag and Impact lag 2Political Constraints Governments may prioritize political cycles over economic logic. 3Financing Constraints High debt limits fiscal space. Other Works by CIRAME Research Center Gerbaix, S., Kaspard, J., & Chapellier, P. (2020). Sophistication du système d’information des PME exportatrices libanaises. Management & Datascience, 4(5). Gerbaix, S., Kaspard, J., & Chapelier, P. (2020). L’émergence organisationnelle du système d’information et de communication des PME exportatrices libanaises: Un essai d’observation et de compréhension. In Conférence de l'Association Information et Management (AIM 2020). Jafarigorzin, S., Khalil, F. C., Khalil, L. J., & Kaspard, J. A. (2025). Machine learning-based localized predictive modeling of household energy consumption in the Netherlands. Energy and Buildings, Article 116420. https://doi.org/10.1016/j.enbuild.2025.116420 Kamel, C. A., Kaspard, J. A., & Khalil, F. C. (2023). The information system of Lebanese exporting SMEs. Journal of Law and Sustainable Development, 11(6), e1212–e1212. https://doi.org/10.55908/jlssdv11n62023-1212 Kaspard, J. (2019). Le système d'information des PME exportatrices libanaises: Observation et essai de compréhension. Université de Montpellier. Other Works by CIRAME Research Center Kaspard, J., Chapellier, P., & Gerbaix, S. (2017). PME et TIC: De l’appropriation à l’utilisation pour une meilleure performance, une revue de la littérature. Proche-Orient Études en management, 29, 21–36. Kaspard, J. A., Khalil, F. C., & Kamel, C. A. (2025). Factors contributing to non-financial performance of companies. In Sustainable economic development: Utilizing non-financial performance indicators for strategic success. Khalil, F. C., Kamel, C. A., & Kaspard, J. A. (2022). Reasons and factors of evolution of the information system in public institutions. Journal of Finance & Banking Review, 7(3). https://doi.org/10.35609/jfbr.2022.7.3 Khalil, F. C., Yin, L. Y., Khalil, L. J., & Kaspard, J. A. (2025). The role of project description in the success of sustainable crowdfunding projects. Journal of Risk and Financial Management, 18(4), 200. https://doi.org/10.3390/jrfm18040200 Makki, M., Kaspard, J., Khalil, F., & Mawad, J. L. (2024). Renewable energy consumption determinants: Do they differ between oil-exporting countries and oil-importing ones? Sustainability, 16(17), 7295. https://doi.org/10.3390/su16177295 Other Works by CIRAME Research Center Beainy, R. H. (2023). The impact of political stability on economic growth: Evidence from developing countries. Holy Spirit University of Kaslik. Beainy, R. H. (2023). The book of Neo. Amazon. https://www.amazon.com/book-Neo-RichardBeainy/dp/B0BTXLM6B2 Beainy, R. H. (2025). Reading numbers like English. Beainy, R. H. (2025). Profit maximization using Dupont/EDGAR. IMA Lebanon Chapter, 1–77. https://doi.org/10.13140/RG.2.2.35462.02888 Beainy, R. H., & Kamel, J. K. (2023). The importance of technology, R&D and AI in the US economy. Migration Letters, 20(8), 573–584. Beainy, R. H., & Kamel, C. A. (2023). Finance for life instead of death. Migration Letters, 20(6), 1051–1060. Other Works by CIRAME Research Center Beainy, R. H., & Kamel, J. K. (2023). Surviving the post Silicon Valley Bank crisis. International Journal of Membrane Science and Technology, 10(3), 775–785. https://doi.org/10.15379/ijmst.v10i3.1598 Beainy, R. H., Khalil, F. C., & Kaspard, J. A. (2024). Europe’s response: Impact of sanctions on Russia. Evolutionary Studies in Imaginative Culture, 8(1), 1168–1185. https://doi.org/10.70082/esiculture.vi.1274 Beainy, R. H., Salloum, C., & (2023). Economic growth: Evidence from developing countries. Chaanine, N., Mhanna, R. Y., Verdie, J. F., & Beainy, R. (2023). Leveraging business experience and knowledge to boost entrepreneurial achievement. International Journal of Work Innovation, 4(2), 104–115. Kamel, C. A., & Beainy, R. H. (2025). Biden versus Trump through science. In The impact of religion on individual and firm. Kamel, C., Beainy, R., & Bteish, M. (2025). In God we trust. International Journal of Innovative Science and Research Technology, 10, 412–419. https://www.ijisrt.com/in-god-we-trust Richard, B., & Charbel, S. (2023). Economic growth: The case of developed and developing economies. International Journal of Innovative Science and Research Technology, 8(2). Richard, B., & Kamel, C. (2025). Biden versus Trump through science. International Journal of Research and Innovation in Social Science, 9(10).