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International Journal of Research and Innovation in Social Science (IJRISS) |Volume VI, Issue XII, December 2022|ISSN 2454-6186

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

Raymond Osi Alenoghena, Samuel David Adebisi, Ayobola Olufolake Charles
Department of Economics, Trinity University, Yaba Lagos, Nigeria

IJRISS Call for paper

 

Abstract: 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.

Keywords: Fiscal Policy, Economic Growth, Gross Fixed Capital Formation, Crowding Out.

I. INTRODUCTION

One of the most traditionally potent tools for regulating an economy over the years is the use of fiscal policy tools, that is, the discretionary use of government expenditure and taxes, to determine the outcomes of the macroeconomic goals. Both instruments are demand management tools often targeted at regulating the aggregate demand in an economy to fast-track or slow down any macroeconomic objectives. Another dimension of fiscal policy tool recently adjudged to be equally potent, although not without its implications on the economy, is fiscal deficit financing. For instance, Reinhart & Rogoff (2010) confirmed that it could impede growth whenever the debt-to-income ratio exceeds 90 per cent. The position of Reinhart & Rogoff (2010) is strongly reinforced by mainstream economists (Ko, 2018).