Fiscal policy-growth nexus in CFA countries: assessing the role of institutional quality and debt

Abstract

The importance of government debt and institutional quality for economic growth has become fundamental, predominantly in a context where policy makers must face snowballing fiscal imbalances. This study investigates the relationship between fiscal policy and economic growth in CFA countries, while also examining the role of institutions and debt in the relationship. Using panel data of thirteen countries over the period 1995–2017, the system GMM estimates have clearly established that contrary to the Keynesian view which postulates a positive relationship between fiscal policy and economic growth, there is strong evidence of a negative relationship between fiscal policy and economic growth. The economic reason behind this result could be because most developing countries (CFA countries included) do not spend on productive sectors of the economy. This could adversely affect growth, despite the fact that government spending increases every year. The findings of the interaction terms show mixed results.