Fiscal Policy and Monetary Integration in the ECOWAS
Date
2021-08-06
Authors
Ony, Kenneth
Umoh, Okon J.
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
Those with dissenting views regarding the structure of monetary union arrangement
in the ECOWAS often argue that the macroeconomic convergence criteria have
hampered the ability of countries in the region to stabilize their economies with
appropriate counter-cyclical fiscal policy. We tested the empirical merit of this
assertion and found no support for this view. Instead, discretionary fiscal policy has
actually become counter-cyclical in ECOWAS after the introduction of convergence
criteria. In specifics, we found a switch from pro-cyclical fiscal policymaking in the
pre-convergence era (1995-2002) to a counter-cyclical fiscal policymaking in the
convergence era (2003-2018) in the ECOWAS, and that policy makers in the region
respond to initial conditions – apparently taking cue from past (initial) debt and past
deficit. The policy import of our result is the need to: (i) introduce more flexibility
in fiscal policy making through discretionary fiscal policy that balances the budget
(against the constraints imposed by the convergence rules) over the business cycle;
and (ii) adopt ‘discretionary fiscal deficit’ to monitor compliance (rather than gross
deficit) because it represents effort made to correct excess deficit.