Fiscal Policy and the Business Cycle in the West African Monetary Zone

Abstract

The Economic Community of West African States has come up with a new single currency to be used for its proposed West African monetary union. It is called eco. Among the West African states are a group of countries collectively referred to as the West African Monetary Zone. For the smooth running of a monetary union, fiscal policy should be sustainable and countercyclical. Main objectives of this study are to assess the relationship between fiscal policy and the business cycle and the role of institutions. Panel data of six countries for the period 2001-2018 were used. A fiscal reaction model was estimated. The cyclical component of real general government expenditure was used to represent fiscal policy while the cyclical component of real Gross Domestic Product (GDP) was used as a proxy for the business cycle. Results showed that West African Monetary Zone member countries exhibit pro-cyclical fiscal policy and weak fiscal sustainability. Also, the quality of institutions has the capability of making fiscal policy less procyclical. The policy implication of this study’s finding is that these countries may not perform well if they go ahead with the single currency union. These countries must make concerted efforts to improve the quality of institutions and implement countercyclical fiscal policies. Meanwhile the proposed monetary union should be suspended.