Soaring inflation in sub-Saharan Africa: A fiscal root?

Olumide O Olaoye; O J Omokanmi; Mosab I Tabash; S O Olofinlade; M O Ojelade

doi:10.1007/s11135-023-01682-z

Soaring inflation in sub-Saharan Africa: A fiscal root?

Qual Quant. 2023 May 19:1-23. doi: 10.1007/s11135-023-01682-z. Online ahead of print.

Authors

Olumide O Olaoye¹, O J Omokanmi¹, Mosab I Tabash², S O Olofinlade¹, M O Ojelade³

Affiliations

¹ Thomas Adewumi University, Oko, Nigeria.
² College of Business, Al Ain University, Al Ain, UAE.
³ Koladaisi University, Ibadan, Nigeria.

Abstract

The study investigates the effect of fiscal policy on the inflation rate in a panel of 44 sub-Saharan African (SSA) countries over the period 2003-2020 using a non-linear system generalized method of moments (system GMM) and the dynamic panel threshold estimation techniques. The results show that the recent increase in inflation rate has a fiscal nature and that monetary policy alone may not provide an effective response. Specifically, the results indicate that a positive shock to fiscal policy (captured by public debts) has a positive and statistically significant effect on inflation, while a negative shock to public debt has a statistically non-significant impact on the inflation rate. Also, money supply exerted a positive and insignificant impact on inflation, indicating that the current inflation rate in the region may not be induced by money supply. However, the joint effect of public debts and money supply shows that public debts aid the effect of money supply on the inflation rate, albeit, not in the proportion predicted by the quantity theory of money. Further, the results also found a public debt threshold point of 60.59% of GDP. This implies the current inflationary pressure may be rooted in fiscal policy and that further accumulation of public debts beyond the benchmark established in the study would worsen the inflationary pressure in SSA. Importantly, the study found that for fiscal policy to spur growth and reduce inflationary pressure in SSA, the inflation rate should be managed and brought within a single-digit framework of 4%. The research and policy implications are discussed.

Keywords: Asymmetry; Fiscal policy; Inflation rate; Money supply; Non-linear estimation; SSA; Threshold.

© The Author(s), under exclusive licence to Springer Nature B.V. 2023, Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.