Monetary-Fiscal Policy Interactions in Africa: Fiscal Dominance or Monetary Dominance?

Peter Mogaji

MPRA Paper from University Library of Munich, Germany

Abstract: This paper evaluates the interactions of monetary policy and fiscal policy in countries within regional economic communities and monetary blocs of Africa (AMU, EAC, ECCA, ECOWAS and SADC) as well as establish the extent of monetary dominance and/or fiscal dominance in the 48 African countries assessed by this study. The modelling of monetary policy in this study followed the standard Taylor rule which makes the nominal interest rate a function of inflation and output gap. On the fiscal policy side, this study applied the fiscal rule suggested by Davig and Leeper (2006) and Leeper (2013, 2016) in which government revenue/GDP ratio reacts to government expenditure ratio, public debt ratio and output gap in modelling fiscal policy. This study applied annual data of monetary policy and fiscal policy rules of the 48 African countries spanning over the period of 33 years between 1990 and 2021. The econometric estimation method employed is the regime switching regressions of Markov regime switching models of the Taylor monetary rule (augmented by interest rate smoothing) and of the fiscal rule augmented with lagged values of government revenue scaled by output. Although, many of the determining coefficient of inflation (for monetary policy) and the coefficient of public debt/GDP ratio (for fiscal policy) yielded in this empirical study are not statistically significant at choice level of significance, results generated reflect combinations of passive monetary policy and passive fiscal policy in the two Markov switching regimes, for all the economies evaluated, with the exception of Cape Verde that demonstrated monetary dominance with the interaction ‘active’ monetary policy and ‘passive’ fiscal policy, only in the switching regime 1. Although, there are apparent similarities in monetary policy and fiscal policy direction in all the five economic and monetary areas of Africa as revealed in this work, the failure to record ‘monetary dominance’ by majority of the African countries does not portend positive implications for the adoption and implementation of a single monetary policy and the supra-national level of Africa if the African Monetary Union project and the dream monetary integration of Africa would come into fruition.

Keywords: Monetary-Fiscal Policy Interaction; Monetary Dominance; Fiscal Dominance; AMU; EAC; ECCA; ECOWAS; SADC (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 F02 F33 F45 (search for similar items in EconPapers)
Date: 2023-01-10
New Economics Papers: this item is included in nep-cba and nep-mon
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