The Effects of Regulatory Quality on the Pro-Cyclicality of Fiscal Policy in Countries in the Central African Economic and Monetary Community (CA EMC)

Jean Roméo Félix Kouika Bouanza,Ted Cléophane Ngassa,Mathias Marie Adrien Ndinga

doi:10.4236/me.2018.97080

Jean Roméo Félix Kouika Bouanza, Ted Cléophane Ngassa + Show 1 more

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https://doi.org/10.4236/me.2018.97080

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Journal: Modern Economy	Publication Date: Jan 1, 2018
Citations: 1	License type: CC BY 4.0

Abstract

This article aims to analyze the effects of the regulatory quality on fiscal pro-cyclicality in CAEMC member countries based on the annual panel data for the years 1996 to 2016. To achieve that, we used, on the one hand, the fiscal policy reaction function (Taylor, 2000) as well as institutional quality, and on the other hand, the system-generalized method of moments (system GMM) to empirically understand the effects of the regulatory quality on fiscal pro-cyclicality in CAEMC member countries. Our findings show that the current state of regulatory quality in CAEMC countries promotes the pro-cyclicality of the fiscal policy in this sub-region. In addition, these findings show that the effect of the current state of regulatory quality on fiscal pro-cyclicality is more significant when the regulatory quality is linked to the economic cycle. It is therefore necessary to bring about profound institutional reform in the CAEMC countries in order to redirect the fiscal budget towards counter-cyclicality.

Highlights

Nowadays, the institutional quality bears great significance in an analysis of fiscal cyclicality, in the sense that institutional governance has, over the last decade or so, provided important leverage that can assist in stabilizing economic activity [1]
Our findings show that the current state of regulatory quality in Central African Economic and Monetary Community (CAEMC) countries promotes the pro-cyclicality of the fiscal policy in this sub-region
According to the Arellano-Bond tests, acceptance of the absence of AR (2) effects must be noted. This demonstrates that the findings are valid and can be used for interpretation. Referring to those findings essentially derived from the general method of moments (GMM)-Sys estimator in (2) and (4), the results appear similar except for the coefficients of regulatory quality and inflation which become significant and that of the debt which loses significance with the GMM-Sys estimator when taking the correction of the heteroskedasticity of the errors into account

Summary

Introduction

The institutional quality bears great significance in an analysis of fiscal cyclicality, in the sense that institutional governance has, over the last decade or so, provided important leverage that can assist in stabilizing economic activity [1]. For critics of counter-cyclicality, a stabilizing fiscal policy must intensify economic fluctuations, that is, the implementation of a restrictive policy in periods of economic slow-down and an expansive policy during a growth period [4]. According to Talvi and Végh [6], the pro-cyclicality nature of fiscal policies in developing countries can be explained by the fact that the tax revenues in these countries are more sensitive to external shocks. According to these authors, when the economic position is in a positive phase, governments often increase expenditure and simultaneously reduce taxes. Not having amassed sufficient savings, governments reduce expenditure and increase taxes in order to maintain economic activity

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