Budget deficits, money supply and price level in West Africa

Using West African Economic and Monetary Union (WAEMU) dataset for 1970 to 2013, and Pesaran et al. (2001) methodology, this study examines the effect of budget deficit and money supply on inflation. Evidence shows that there is a long run relation among the variables in all countries except Mali. Price and budget deficit are positively related in Niger and Togo, and negatively related in Benin and Senegal. Further, money supply and price are positively related in Burkina Faso, Cote d’Ivoire and Senegal. Results from the Granger causality tests indicate that deficits cause money growth in Cote d’Ivoire, Mali and Togo, and cause the price level in Senegal. There is no causality from money supply to inflation in the short-run. Results suggest that idea that budget deficits are not inflationary in WAEMU countries. Hence, the policy of reducing inflation should focus on other macroeconomic and structural determinants of inflation across WAEMU.