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Macroeconomic determinants of fiscal policy in East Africa: a panel causality analysis

Author

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  • Joseph Mawejje
  • Nicholas M. Odhiambo

Abstract

Purpose - This study investigates the dynamic causality linkages between fiscal deficits and selected macroeconomic indicators in a panel of five East African Community countries. Design/methodology/approach - The research design is based on panel cointegration tests, panel cross-section dependence tests, panel error correction-based Granger causality tests and panel impulse response functions. Findings - Results show that there is long-run feedback causality among fiscal deficits and each of the variables include gross domestic product (GDP) growth, current account balance, interest rates, inflation, grants and debt service. Short-run Granger causality dynamics indicate that there is feedback causality between fiscal deficits and GDP growth; no causality between fiscal deficits and inflation; no causality between fiscal deficits and current account; no causality between fiscal deficits and interest rates; feedback causality between fiscal deficits and grants; and no causality between fiscal deficits and debt service. Impulse response functions show positive and significant impacts of current account balance, inflation and grants; negative and significant impacts of real GDP growth and lending rates; and insignificant effects of debt service. Research limitations/implications - While the study examines the dynamic causality between fiscal deficits and selected macroeconomic indicators in the East African Community, the analysis excludes South Sudan due to significant data limitations. Practical implications - In light of the East African Community's aspirations to achieve convergence on key macroeconomic targets, including the fiscal deficit, this research provides novel insights on fiscal policy determinants and causality dynamics. Social implications - The dynamic relationships between fiscal policy and macroeconomic variables may have social implications for welfare, equitable growth and distribution of resources. Originality/value - With a focus on the East African Community, this paper contributes to the literature on the macroeconomic determinants of fiscal deficits in regional economic communities.

Suggested Citation

  • Joseph Mawejje & Nicholas M. Odhiambo, 2022. "Macroeconomic determinants of fiscal policy in East Africa: a panel causality analysis," Journal of Economics, Finance and Administrative Science, Emerald Group Publishing Limited, vol. 27(53), pages 105-123, February.
    • Handle: RePEc:eme:jefasp:jefas-07-2021-0124
    DOI: 10.1108/JEFAS-07-2021-0124
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    Cited by:

    1. Malik Muhammad & Mumtaz Anwar Chaudhry & Shabib Haider Syed & Mahwish Saeed, 2023. "Instability of government revenues and expenditures: implications for budget deficit in Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(6), pages 4971-4983, December.
    2. Joseph Mawejje, 2024. "Government expenditure, informality, and economic growth: Evidence from Eastern and Southern African countries," African Development Review, African Development Bank, vol. 36(1), pages 125-138, March.

    More about this item

    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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