Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/339338 
Year of Publication: 
2025
Series/Report no.: 
WAMI Occasional Paper Series No. 37
Publisher: 
West African Monetary Institute (WAMI), Accra
Abstract: 
The West African Monetary Zone (WAMZ)'s economy has faced persistent fiscal deficits over the years, and this has affected other macroeconomic indicators like inflation. This study empirically examines the effect of fiscal deficit on inflation dynamics in the WAMZ. It employs the Panel Smooth Threshold Regression model, using annual data spanning from 2002 to 2023. The findings revealed a nonlinear relationship between inflation and fiscal deficit in the WAMZ, with two distinct regimes. These regimes comprise a linear part and a nonlinear part, with the fiscal deficit as the threshold variable alongside key inflation drivers. The estimation of the model coefficients smoothly switches from linear to nonlinear forms, with an optimal fiscal deficit threshold of 6.16 percent per annum in the Zone. Below this threshold, the fiscal deficit in WAMZ member states mitigates significant welfare losses. However, above this threshold, its coefficient becomes positive and statistically significant at the 5 percent level of significance, suggesting that exceeding this level of deficit funding would negatively affect the inflation rate, leading to potential welfare losses due to the inflation tax. The study recommends a fiscal strategy based on a threshold of 6.16 percent for fiscal deficit in the Zone to prevent the adverse effects of inflation. Additionally, the study recommends fiscal consolidation, which will help to rein in external imbalances and contain the increase in debt related to currency depreciation.
Subjects: 
Inflation
Fiscal deficit
Panel threshold models
PSTR
WAMZ
Document Type: 
Research Report

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