No abstract

The effect of fiscal deficit on inflation and growth, has been a highly contested issue in economics. Studies on the issue generally have sought to ascertain whether deficit in the fiscal balance has positive or negative effect on inflation and/or growth, neglecting the question of mediating variables in the process. In this study, we consider the consequences of selected mediating variables, money growth and general public consumption, in the context of the relationship among fiscal deficit, inflation and growth in the case of the West African Monetary Zone. The study is based on Multilevel Structural Model (1, 1, 1) within the framework of dynamic structural equation model. We found that when the relationship between inflation and fiscal deficit is mediated by growth of money, it does not show any statistical credibility, thus, member-countries are not prone to finance deficits by expanding growth of money. On the other hand, general public consumption is a statistically credible mediator between fiscal deficit and growth, but its effect is negative on growth. This implies that increased general public consumption occasioned by increased fiscal deficit is counter-productive to growth outcomes in the sub-region.