Political Influence on Fiscal and Monetary Policy in Sub-Saharan Africa

Rebecca Neumann and John Ssozi

Journal of African Economies, 2016, vol. 25, issue 1, 55-109

Abstract: This article examines the extent to which political variables affect budget deficits, money growth and inflation in Sub-Saharan Africa (SSA). Using the Arellano–Bond dynamic panel data analysis on 36 SSA countries from 1980 to 2010, we first characterise the impact of presidential elections on two policy variables: government budget deficits and money growth. We then examine the impact of government budget deficits and money growth on inflation, while taking account of any direct political pressure via presidential elections. Importantly, we show that country groups, based on the level of income, are important in teasing out the varying effects of budget deficits and elections, finding evidence of political budget cycles and political monetary cycles in the middle-income countries. We also characterise whether a country is part of a fixed-exchange rate regime, showing that this limits electoral pressure on the monetary policy variable. We examine the competitiveness of elections by whether they are multiparty or single-party elections and by whether there is an incumbent candidate running for re-election. When we examine the feed-on effects on inflation, there is little indication that the election pressures on either fiscal or monetary variables become inflationary. There is evidence, however, of money growth and budget deficits being directly inflationary, particularly in the low-income countries.

Date: 2016
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