The Effect of Fiscal Policy Volatility on Economic Growth: Case of Selected African countries

Although fiscal policy is one of the main macroeconomic policies used for addressing multifaceted economic problems, there is still a strong debate on the long run effect of aggressive fiscal policy. Accordingly, this study aims to investigate the effect of fiscal policy volatility on economic growth across 35 African countries for the period 1990-2020. This paper departs from the previous studies first by focusing on overall fiscal policy volatility and its discretionary changes/aggressiveness instead of level; second, the study used data averages in terms of non-overlapping intervals in the estimation exercise; third, the study considers structural break. In doing so, the study employed a two-step system generalized method of moment (GMM). The result reveals the negative effect of politically-induced fiscal policy volatility and trade openness on economic growth. On the contrary, overall fiscal policy volatility, gross capital formation, foreign direct investment, and financial development have a positive effect on economic growth. The main result of the study is appears to be robust with other panel estimation techniques. Thus, the responsible authorities in Africa are recommended to reduce discretionary change of fiscal policy volatility by strengthening the appropriate institutional framework that enhances transparency and accountability. Side by side, in such economies expanding export, shifting government spending to capital items, creating conducive environment for both domestic and foreign investors could raise capital formation and foreign direct investment.