Fiscal Policy and Macroeconomic Variables in Africa: A Bayesian VAR Approach

Government spending by African countries has generally been on the rise recently. This study investigates the effect of government spending on macroeconomic variables in 25 African countries from 2002 to 2019. The study utilises the Bayesian Vector Autoregression (BVAR) approach for the analysis. The study results indicate that fiscal policy positively and significantly impacts gross fixed capital formation and broad money. As a follow-up, the effect of fiscal policy is significant and negative on economic growth. Although fiscal policy’s outcome positively affects inflation and trade openness, the effect is insignificant. Also, while the impact of fiscal policy on the industrial production index is negative, the impact is not significant. The study recommends a well-coordinated and further boost to government spending to promote capital investment in these African countries. The policy of a better-managed increase in government expenditure should enhance investment and productivity to correct the negative impact of government expenditure on industrial production. More specifically, the government should spend more on projects with the potential of increasing productivity rather than recurrent and non-productive ventures with the tendency to increase inflationary pressures.