Fiscal and Monetary Policy Coordination in the WAMZ: Implications for Member States’ Performance on the Convergence Criteria

Abstract

There have been persistent high fiscal deficits, inflation and interest rates in Member States of the West African Monetary Zone (WAMZ). Thus, inflation and fiscal deficit criteria are the most difficult to satisfy in the Zone. This study, therefore, seeks to investigate the level of coordination between the fiscal and monetary authorities in each of the WAMZ countries and its implications for the attainment of the inflation and fiscal deficit criteria. To achieve this objective, the study utilizes the Set Theoretic Approach (STA) and the vector autoregressive (VAR) modelling to estimate the degree of policy coordination in the Zone. Under the STA, coordination exists when shocks to policy goals elicit prudent policy responses. In case of the VAR, the strength of coordination is measured by the impulse responses of fiscal and monetary policy variables to innovations in inflation, output gap and exchange rate. Both the STA and VAR estimations made use of annual data for the period 1980–2011. The study finds that there were weak policy coordination and insufficient policy prudence in all the WAMZ countries during the study period, contributing to the non-compliance with inflation and fiscal deficit criteria. The key recommendation is that WAMZ countries should strengthen policy coordination by putting in place formal coordination platforms and institutional arrangements for timely and adequate statistics, binding commitments and effective monitoring and evaluation of policy outcomes.

A paper presented at the Fourth Annual Conference for Regional Integration in Africa, Abidjan, Côte d’Ivoire, July 4–6, 2013.