- Tetsuya Konuki, and Mauricio Villafuerte
- Published Date:
- August 2016
The data source for the analysis is the IMF’s 2015 Spring World Economic Outlook database, except for institutional quality and trading partners’ output volatility. The country sample comprises 43 sub-Saharan African countries: all sub-Saharan African countries excluding South Sudan and Zimbabwe. The sample period extends from 2000 to 2014 for all countries, except for Cabo Verde (2002–14), Chad (2004–14), Malawi (2002–14), Niger (2006–14), and São Tomé and Príncipe (2001–14).
Gross domestic product (GDP): Series Nominal Gross Domestic Products (NGDP) is used for countries other than resource-rich countries. See footnote 4 for the definition of resource-rich countries and which countries are classified in that category.
Nonresource GDP: GDP excluding value added of the commodity sector is used for resource-rich countries.
Output gap: Difference between actual real GDP and potential real GDP in percent of potential GDP. NGDP is deflated by the GDP deflator to calculate real GDP. Potential real GDP is the trend of real GDP calculated by the Hodrick-Prescott filter. See footnote 6.
Nonresource output gap: Difference between actual real nonresource GDP and potential nonresource real GDP in percent of nonresource potential GDP. Nominal nonresource GDP is deflated by the nonresource GDP deflator to calculate real nonresource GDP. Potential real nonresource GDP is the trend of real GDP calculated by the Hodrick-Prescott filter.
Primary fiscal balance: Measured as government revenue excluding grants minus primary expenditure. Primary expenditure is total expenditure and net lending minus interest payments by the government.
Nonresource primary fiscal balance: Measured as government revenue excluding grants, and commodity revenue minus primary expenditure.
Institutional quality (IQ): The World Bank’s Worldwide Governance Indicators for the period of 1996–2012 are the data source. Chapter 4 explains how the index of IQ for each country is calculated.
Financial depth: Measured as credit to the private sector in percent of GDP. See Chapter 4.
Debt-to-GDP ratio: Measured as total general government debt in percent of GDP at the end of year.
Foreign reserves coverage: Measured as the holdings of foreign exchange under the control of monetary policy (gross international reserves) at the end of the year in months of imports of goods and services in the current year.
Terms-of-trade volatility: Measured as the variance of series TT (terms of trade, goods, and services) from 2015 Spring World Economic Outlook database during the period of 2001–13.
Trading partners’ output volatility: Measured as the variance of an index of real GDP growth of each of the country’s five biggest trading partners, following Ilzetzki and Vegh (2008). Trade partners’ growth was weighted by the share of the country’s total exports to each of its trading partners, taken from the IMF’s Direction of Trade Statistics. Finally, each country’s weighted-trade-partner growth was deflated by the country’s average ratio of exports to GDP over the sample period to calculate the index of the real GDP growth of trading partners’ growth.
Following Ilzetzki and Vegh (2008), this paper relies on a few econometric tests to show supporting evidence for the notion that output shocks drive fiscal policy among sub-Saharan African countries.
First, a panel GMM estimation is run to see whether the behavior of fiscal policy in sub-Saharan African countries is reacting to output shocks or causality is running from the opposite side in a following specification:
where yi,t is the cyclical component of real output of country i in year t, gi,t is the cyclical component of real primary government spending, and β is the parameter of interest, which reflects the cyclicality of primary spending, the fiscal policy instrument of the government. Cyclical components of output and primary spending are measured as the percentage deviation from the trend calculated by Hodrick-Prescott filter. If the coefficient β turns out to be significantly positive even after properly instrumented, it will indicate that fiscal policies in sub-Saharan African countries are procyclical. The instrument for this GMM estimation is the weighted real output growth of each country’s trading partners, change in each country’s terms of trade (TOT), and change in real interest rate on six-month U.S. Treasury bills (proxy for the global liquidity condition).22
Table A1 reports the result of this panel GMM estimation. An over-identification test does not reject the null that the instruments are valid at a conventional significance level. The coefficient on the cyclical component of real output is positive and significant at the 5 percent level. This implies that output shocks are causing fiscal policy shocks among sub-Saharan African countries even after properly instrumented.
|Real GDP cycle||1.857||2.227 **|
|Hansen’s J-statistics (p-value in brackets)||3.512 [0.173]|
|Number of observations (unbalanced panel)||826|
|Number of countries||43|
Second, a Granger causality test of the cyclical components of real output and real primary fiscal spending is conducted. Table A2 reports the results. At the 5 percent significance level, the null that output shock does not Granger-cause fiscal primary spending shock can be rejected. Meanwhile, the null that fiscal primary spending shock does not Granger-cause output shock cannot be rejected at a conventional significance level.
|Null hypothesis||Zbar statistics||p-value|
|Real government primary spending cycle does not Granger-cause real GDP cycle||−0.762||0.446|
|Real GDP cycle does not Granger-cause real government primary spending cycle||2.054||0.040 **|
|Number of observations||860|
Those econometric tests provide evidence supporting the implicit assumption used in this paper: output shocks drive fiscal policy among sub-Saharan African countries.
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