Fiscal Policy and Monetary Integration in the Ecowas

Abstract

Those with dissenting view regarding the structure of monetary union arrangement in ECOWAS often argue that the macroeconomic convergence criteria have hampered the ability of countries in the region to stabilize their economies with appropriate counter-cyclical fiscal policy. We test the empirical merit of this assertion and found no support for this view. Instead, discretionary fiscal policy has actually become counter-cyclical in ECOWAS after the introduction of convergence criteria. In specifics, we found a switch from pro-cyclical fiscal policymaking in the pre-convergence era (1995–2002) to a counter-cyclical fiscal policymaking in the convergence era (2003–2018) in ECOWAS, and that policymakers in the region respond to initial conditions - apparently taking clue from past (initial) debt and past deficit. The policy import of our result is the need to: (i) introduce more flexibility in fiscal policymaking through discretionary fiscal policy that balances the budget (against the constraints imposed by the convergence rules) over the business cycle; and (ii) adopt ‘discretionary fiscal deficit’ to monitor compliance (rather than gross deficit) because it represents effort made to correct excess deficit.