Threshold and Spatial Effects of Fiscal Policy on Business Cycle Synchronisation in the Economic Community of West African States

Abstract

This research analyses the threshold effects of fiscal policy on business cycle synchronisation in the Economic Community of West African States (ECOWAS). The main contribution is the analysis of the effects of respecting versus not respecting deficit and debt thresholds on the synchronisation of business cycles through the creation of binary variables. The study covers the period 1990–2020 and fourteen ECOWAS countries. The results show that the optimal pro-growth thresholds for the budget deficit and debt are 5.559% and 45.61% of GDP, respectively. Furthermore, spatial analysis reveals significant positive spatial spillover effects of respecting these thresholds on synchronising business cycles within ECOWAS. The current convergence criterion of −3% for the budget balance is favourable for growth and business cycle convergence. In addition, the current debt convergence criterion of 70% of GDP could be adjusted. Our results suggest the need to strengthen revenue mobilisation, harmonise taxation and improve the monitoring of fiscal standards.