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Asymmetric Pass-through of Taxation and Deficit Financing to Inflation: Evidence from the West African Monetary Zone (WAMZ)

Evwienure Ibunor Agama, Christopher Ifeanyi Ezekwe

Abstract

In this study, we deepen the understanding of the asymmetric effects of tax revenue, deficit financing, and debt servicing on inflation in the member countries (Ghana, Guinea, The Gambia, Liberia, Nigeria, and Sierra Leone) of the West African Monetary Zone (WAMZ). We employ a non-linear autoregressive distributed lag model (NARDL) and the Toda- Yamamoto causality test to analyze the datasets obtained from the Organization of Economic Cooperation and Development (OECD) Statistics and World Development Indicators (WDI). The findings indicate that the inflation rate responds negatively to positive changes in tax revenue. This implies that an increase in taxation reduces the rate of inflation in the long run. The partial sums of positive and negative changes in external debt stock have mixed effects on the inflation rate over the long term. While the inflation rate responds positively to positive changes in external borrowings, its response to negative changes in external borrowings is significantly negative at the 5% level. The positive effect of external borrowings on the inflation rate demonstrates that funds borrowed from external sources increase the money supply, which stimulates inflationary pressures in the region. Further analysis revealed that the asymmetric long-term effect of external debt servicing on the inflation rate is positive. This indicates that an increase in debt servicing is inflationary in the long run. Given the findings, we recommend that the fiscal authorities in the WAMZ, especially the Ministry of Finance, Debt Management Agencies, and the West African Monetary Institute (WAMI), ensure that loans from external sources to member countries are directed towards fostering higher long-term growth to maintain price level stability.

Keywords

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