The Budget Deficit and Private Consumption Nexus: Cointegration and Causality Evidence from WAEMU Countries

Abstract

This study uses time series data to examine the causal relationship between budgetdeficit and household consumption in the member countries of the West African Economic andMonetary Union (WAEMU). It makes use of the ARDL bounds testing approach to cointegration and Granger causality tests. Real GDP per capita and credit to private sector provided by banks are used as control variables for incomeand liquidity constraints. The empirical results showevidence of long-run relationship among the variables for all countries, with budget deficit having a positive effect on private consumption in Burkina Faso and Niger.This suggests that private consumption cannot be held responsible for any crowding-out effects that budget deficit might have on aggregate demand and economic growth in these two countries. In terms of causality, the results for six countries indicate that budget deficit does not cause private consumption in short run. Overall, the findings of this study lend support to the control of budget deficits within WAEMU area in order to increase domestic saving and finance social and economic development.