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Monetary-Fiscal Policy Interactions and Tests for Monetary Dominance in the West African Monetary Zone

Mogaji, Dr Peter Kehinde (2017): Monetary-Fiscal Policy Interactions and Tests for Monetary Dominance in the West African Monetary Zone.

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Abstract

This study applied the fiscal rule suggested by Davig and Leeper (2005, 2013) in which government revenue/GDP ratio reacts to government expenditure ratio, public debt ratio and output gap in modelling fiscal policy in the WAMZ. The applied monthly monetary and fiscal data span from 2001M1 to 2015M12. The econometric estimation method employed is the regime switching regressions of Markov regime switching models of the Taylor monetary rule (augmented by interest rate smoothing) and of the fiscal rule augmented with lagged values of government revenue scaled by output. Estimation results are varied across the six WAMZ countries. Given the high probability of staying in either of the regime, for the six WAMZ countries, these results are good enough for the membership of the proposed monetary integration of West Africa.

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