The Relative Effectiveness of Monetary and Fiscal Policy on Growth in Waemu Countries

Abstract

In order to promote sustainable economic growth, there is a need for WAEMU countries to implement an appropriate policy mix. The study empirically analyses the relative effectiveness of monetary and fiscal policy on economic growth in WAEMU countries. The investigation of the relative effect of both policies was done in an unrestricted vector autoregressive VAR framework which was based on a modified version of the St Louis model. The VAR model was analysed using the Impulse Response Functions (IRFs) and Variance decompositions (VDCs). The results showed that in WAEMU countries, the effect of fiscal policy on growth is more important and lasting relative to monetary policy. However, due to the differences in their macroeconomic structure, the effect of both policies on growth in terms of sign and magnitude differs from one country to the other. Promoting growth in WAEMU countries would therefore require the implementation of reforms to improve the quality of public spending. Furthermore, economic reforms to improve liquidity trading, strengthen financial intermediation and reduce excess liquidity in the financial market would help increase the effectiveness of monetary policy in the zone.