Tests for Fiscal Dominance in the Anglophone West Africa and Guinea: A Quantile Regression Approach

Fiscal policy is dominant (over monetary policy) when the stability of the price level has turned to be fiscal policy’s concern, thus making monetary policy redundant in the pursuant of the crucial price stability objective. This is a point of reversal of monetary policy and fiscal policy roles. By giving room to a high level of public debt, fiscal policy takes over the role of stabilising the price level from monetary policy. In effect, a fiscal dominance regime therefore connotes a system in which monetary tools are applied to guarantee the solvency of the government. This paper examined fiscal dominance in the Anglophone West Africa (The Gambia, Ghana, Liberia, Nigeria and Sierra Leone) and Guinea. These six countries were known as the West African Monetary Zone – WAMZ. This study is significant because of the need for the stability of the future monetary union which would be characterised by a single monetary policy in the West African sub-region while the fiscal policy governance would be at the national levels. The huge implication of fiscal dominance is that its absence is one of the conditions for the optimal functioning of monetary policy in achieving its objectives. The paper considered the view-points in Fiscal Theory of Price Level (FTPL) as put forward by Leeper (1991). Dynamic quantile regressions within the context of the autoregressive distributed lag (ARDL) specification were applied. This allowed for necessary dynamic adjustments with the ARDL modelling in which inflation rate as the response (dependent) variable was regressed on the lagged value of itself and lagged value of fiscal ratios as the independent variables in the study covering the period between 1980 and 2014. Evidence gathered from this research work led the broad suggestion that fiscal dominance could not be ‘significantly’ established in the Anglophone West African countries and Guinea (the WAMZ). The implications this has for the future monetary union is that there are evidence to suggest that price stability in each of the ...