Fiscal rules and the cyclicality of fiscal policy in the East African community

We examine the cyclicality of government expenditure and the impact of fiscal rules in a panel of five East African Community (EAC) countries using annual data for the period 1980-2019. The analysis is based on pooled ordinary least squares and panel autoregressive distributed lag regressions. We find that government consumption is acyclical while investment is procyclical. In addition, we find suggestive evidence that fiscal policy became less procyclical following the adoption of fiscal rules consistent with the EAC macroeconomic convergence criteria. These results highlight the importance of strengthening the scope and implementation of existing fiscal rules to facilitate the complete transition to countercyclical fiscal policy stance.

Automated summary

We examine the cyclicality of government expenditure and the impact of fiscal rules on five East African Community (EAC) countries using data from 1980 to 2019. Our analysis shows that government consumption is not affected by economic cycles, while investment is influenced by economic cycles. We also find evidence suggesting that following fiscal rules aligned with EAC macroeconomic convergence criteria leads to less procyclical fiscal policy. These findings emphasize the importance of strengthening fiscal rules to enable a complete transition to a countercyclical fiscal policy stance.