Do Monetary Expansion Hypotheses Hold in the WAMZ?

This paper tests test if two of the monetary expansion hypotheses hold in the West African Monetary Zone (WAMZ). The WAMZ consists of The Gambia, Ghana, Guinea, Nigeria, Nigeria and Liberia. The monetary expansion hypotheses tested are the Government-push Hypothesis/Budget Deficit Hypothesis and the Balance of Payment Surplus Hypothesis. The postulation of budget deficit hypothesis is that the size of government budget balance significantly affects monetary expansion. The balance of payments surplus hypothesis conjecture is that monetary expansion emanates from surpluses in balance of payments or changes in international reserve position. The models derived from these hypotheses reflect changes in money supply as a function of changes in government budget balance and changes in international reserves. Autoregressive distributed lag dynamic effects are introduced into the model. Fixed Effects (within), Random Effects Generalised Least Square and Random-effect Maximum Likelihood regressions are the three unbalanced panel data estimation methods employed for annual data of money supply, budget balance and international reserves, spanning averagely over the period of 14 years between 1980 and 2014. The random effect output reveal that the Government-push Hypothesis/Budget Deficit Hypothesis holds while there was no evidence of such for the Balance of Payment Surplus Hypothesis. These results suggest that for the WAMZ as a future monetary union, it is likely that with the effects of past changes in money supply and budget balance, there would be contraction of monetary base whenever budget balance goes up. The implication of this for the monetary union is that conflict of interests (in between actions at both national and union levels) in monetary expansion decision.