An empirical estimate of the optimal level of fiscal deficit in Guinea

Abstract

Excessive deficits, irrespective of the mode of financing, are assumed to be growth retarding. The conventional wisdom is that high budget deficit is a source of economic instability. Empirical research, however, does not conclusively support this conventional wisdom; results are mixed and controversial across countries . These conflicting results have raised the important question of heterogeneity and also underscored the usefulness of time series data for country specific studies in order to address heterogeneity. This paper sought to ascertain the relationship between fiscal deficits and economic growth in Guinea and to find the threshold level of fiscal, deficit that is conducive for growth. The empirical results indicate that there exist a positive relationship between fiscal deficit and economic growlh in Guinea albeit with a one year lag. The threshold level of fiscal deficit conducive for economic growth for Guinea was identified ot 3.0 per cent. The findings of this paper provide ample evidence in support of the proposition that fiscal, deficit beyond certain threshold is detrimental to growth. This suggests that the Guinean authorities shoud endeavour to implement policy measures aimed at reducing fiscal deficits to levels below or equal to 3.0 per cent (levels consistent with economic growth).