Abstract
With the help of a vector model for dynamic panel error correction (PVEC), this article examines the extent to which a country’s policy shocks spread to the economic activity of other countries in the West African Economic and Monetary Union (WAEMU). The results of one part, the emergence of externalities that cause asymmetric shocks and another part, the public expenditure shocks induce greater spillover effects on economic growth than public revenue shocks. Both results imply the structural heterogeneity of economies, leading to an uneven distribution of the benefits and costs of a common monetary policy. Therefore, corrective measures can be applied, through a real policy mix, which can reduce the risks of instability related to budgetary externalities.
Highlights
Like the euro zone, the West African Economic and Monetary Union (WAEMU) is a monetary union with no central or federal budget
The purpose of this paper was to analyze the effects of budgetary spillovers on the economic activity of the WAEMU countries using a dynamic panel vector error correction model (PVEC)
The objective was first to check whether a budgetary policy shock in one country produces similar effects in all neighboring countries and to measure the impact of these fiscal externalities on the economic growth of each country
Summary
The West African Economic and Monetary Union (WAEMU) is a monetary union with no central or federal budget. In times of financial stress, governments cannot rely on the funding of a national central bank, which strengthens ex-ante budgetary discipline but makes countries more fragile ex-post. The absence of both national monetary policies and a common budget places the burden of stabilization on national budgetary policies [1]. Given the resurgence of exogenous shocks, budgetary policies, despite their consequences, remain the only means by which balance can be restored. These consequences, known as “Spillover Effects”, continue to fuel the debate in search of optimal solutions for monetary unions. The excessive use of the budget instrument amplifies the level of public deficits generating externalities that question its effectiveness
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