Spillover Effects of Budgetary Policies in Monetary Union: The Case of WAEMU

Abstract

With the help of a vector model for dynamic panel error correction (PVEC), this article examines the extent to which a country’s policy shocks spread to the economic activity of other countries in the West African Economic and Monetary Union (WAEMU). The results of one part, the emergence of externalities that cause asymmetric shocks and another part, the public expenditure shocks induce greater spillover effects on economic growth than public revenue shocks. Both results imply the structural heterogeneity of economies, leading to an uneven distribution of the benefits and costs of a common monetary policy. Therefore, corrective measures can be applied, through a real policy mix, which can reduce the risks of instability related to budgetary externalities.