Interrelation between Government’s Policies in Different Markets

Government has complicated multi-dimensional role in Economics. The effect of its policies would not be restricted inside the targeted market but changes the equilibrium and resource allocation on all other markets and, hence, the consistency of government policies is extremely important. In the literature although the role of government has been discussed hugely, however, the interrelation and dependency between government policies has not been considered as it weights. This article using structural equations modeling tries to analyze various dimensions of government interventions and determine the interrelation between its policies on different markets. Focusing on monetary, credit and foreign exchange markets, the results indicate a substitutive relation between interventions on credit and foreign exchange markets and complement relations between these two with money market. The substitutive relation between credit and foreign exchange market means that government has intervened in both to control external shocks and protect domestic production. But the effect of interventions is not restricted inside these two markets. The results show that monetary policies of government have been passive. In the last three decades government interventions in exchange and credit market have determined and leaded government policies in monetary market.