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Fiscal Reaction Functions in the CFA Zone

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  • Oral Williams
  • Olumuyiwa Adedeji

Abstract

The stance of fiscal policy in CEMAC and WAEMU is strongly influenced by fiscal effort in the previous period. This persistence underscores the risks of a procyclical fiscal policy stance, given these countries'' high degree of dependence on primary commodities and exposure to terms of trade shocks. This paper finds that the coefficient of the lagged debt stock was significant and positive, consistent with the theory that higher levels of debt warrant greater fiscal effort. Various measures of economic performance, as captured by economic growth and per capita GDP, openness, and the terms of trade were also found to be important factors in explaining fiscal performance. As fiscal performance seems to be strongly affected by both real GDP growth and terms of trade fluctuations, there appears to be a need to develop supplementary fiscal-related criteria that take into account the influence of output and the terms of trade.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/232.

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Length: 19
Date of creation: 01 Oct 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/232

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Keywords: Debt sustainability; Central African Economic and Monetary Community; West African Economic and Monetary Union; Economic growth; Economic models; debt; fiscal policy; fiscal balance; fiscal performance; public debt; primary fiscal balance; expenditures; fiscal effort; external debt; interest; deficits; payments; debt relief; fiscal convergence; fiscal reaction functions; fiscal reaction; budget deficits; tax base; fiscal stance; foreign debt; fiscal discipline; fiscal convergence criterion; primary deficit; tax revenue; fiscal affairs; fiscal outcomes; fiscal convergence criteria; fiscal revenues; tax revenues; government spending; budget balance; expenditure restraint; fiscal prudence; public finances; fiscal adjustment; capital expenditures; solvency; fiscal efforts; fiscal space; debt forgiveness; fiscal sustainability; capital expenditure; taxes; fiscal authorities; debt crises; fiscal affairs department; fiscal targets; liabilities; fiscal indicators; multilateral debt; fiscal frameworks; fiscal rules; fiscal framework;

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References

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  1. Jean-Louis COMBES & Tahsin SAADI SEDIK, 2002. "How does Trade openness Influence Budget Deficits?," Working Papers 200209, CERDI.
  2. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  3. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
  4. Savvides, Andreas, 1998. "Trade policy and income inequality: new evidence," Economics Letters, Elsevier, vol. 61(3), pages 365-372, December.
  5. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  6. Xavier Debrun & Paul Masson & Catherine Pattillo, 2005. "Monetary union in West Africa: who might gain, who might lose, and why?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 454-481, May.
  7. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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Citations

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Cited by:
  1. Heinz Handler, 2013. "The Eurozone: Piecemeal Approach to an Optimum Currency Area," WIFO Working Papers 446, WIFO.
  2. Sylviane Guillaumont Jeanneney & Sampawende Jules Tapsoba, 2011. "Pro cyclicité de la politique budgétaire et surveillance multilatérale dans les unions monétaires africaines," Working Papers halshs-00554337, HAL.
  3. Fadia Al Hajj & Gilles Dufrénot, & Kimiko Sugimoto & Romain Wolf, 2013. "Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Ghana, South Africa and the WAEMU," William Davidson Institute Working Papers Series wp1062, William Davidson Institute at the University of Michigan.
  4. Gnangnon, Sèna Kimm, 2013. "Structural vulnerability and excessive public indebtedness in CFA Franc Zone countries," Economic Modelling, Elsevier, vol. 35(C), pages 816-832.
  5. Truong Nguyen, 2013. "Estimating India's Fiscal Reaction Function," ASARC Working Papers 2013-05, The Australian National University, Australia South Asia Research Centre.
  6. Sèna Kimm Gnangnon, 2012. "Structural Vulnerability and Excessive Public Indebtedness in CFA Franc Zone Countries," Working Papers halshs-00749470, HAL.
  7. International Monetary Fund, 2011. "The Cyclicality of Fiscal Policies in the CEMAC Region," IMF Working Papers 11/205, International Monetary Fund.

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