Fiscal Policy and Economic Stabilization Dynamics in Sub-Saharan Africa: A New Evidence from Panel VEC Model and Hodrick-Prescott Filter Cyclical Decomposition

Abstract

This study investigates the dynamics of fiscal policy and economic stabilization using a panel dataset from Sub-Saharan Africa (SSA) sourced from the World Development Indicators (WDI) between 1985 and 2019. The study utilized a panel vector error correction model (VECM) rather than panel vector autoregression (PVAR) after ascertaining the presence of cointegrating equations (existence of long-run relationships). Also, both homogenous and heterogeneous panel unit root processes were utilized to test the panel data’s stationarity before estimating the panel VECM. Again, the cyclical decomposition (Hodrick-Prescott Filter) is adopted in examining the effect of fiscal policy on economic stabilization across countries in SSA. Essentially, the VECM estimation result reveals that both government expenditure (GEX) and total reserves (TRS) have significant long-run relationships but are not substantial enough to stimulate economic growth and stability in the short run. Simultaneously, the Hodrick-Prescott Filter’s (HP-filter) cyclical decomposition confirms the non-stability of economic growth and stabilization in SSA over time. In line with other numerous policy recommendations, the SSA countries’ governments should improve on the policies targeted toward controlling the financial (fiscal) leakages to ensure more robust economic stabilization in the region through increases in total revenue and reserves both in the short and long-run.JEL Classification Codes: E62, E63, F38, F41, H50.