Dynamic Analysis of the Relationship Between Budget Deficit Financing Modes and Inflation in Africa
Abstract
This paper investigates the dynamic short- and long-run effects of four budget deficit financing modes—monetary financing (seigniorage), domestic borrowing, external borrowing, and taxation—on inflation across 50 African countries over 1995—2024. Using 1,500 country-year observations, we apply cross-sectionally augmented unit root tests, Westerlund panel cointegration tests, and the Pooled Mean Group (PMG), Mean Group (MG), and Common Correlated Effects Mean Group (CCEMG) estimators, with Driscoll—Kraay standard errors and system-GMM as robustness checks. Monetary financing is the dominant long-run inflationary driver: a one percentage point rise in the seigniorage-to-GDP ratio increases log inflation by 0.682 points (p < 0.01). The nominal exchange rate is a key transmission channel (coefficient: 0.385, p < 0.001), while tax revenues exert a robust disinflationary effect (−0.348, p < 0.01). Domestic borrowing generates moderate long-run inflationary pressure (0.214, p < 0.05), and external debt effects are contingent on the exchange rate regime. CFA franc zone membership reduces the seigniorage coefficient to an insignificant 0.163, versus 0.847 (p < 0.01) for non-CFA countries. Central bank in-dependence further attenuates the seigniorageinflation nexus. These findings have direct implications for fiscal-monetary coordination and central bank institutional design in Africa.