Causal links between public debt and inflation in sub-Saharan African countries

Abstract

This study aims to investigate and compare both symmetric and asymmetric causal relationships between public debt and inflation across a panel of 14 sub-Saharan African countries over the period 1990 to 2021. It also examines trends in Country Policy and Institutional Assessment (CPIA) scores, particularly in the domains of debt policy and the efficiency of revenue mobilization. The analysis employs Konya's (2006) symmetric bootstrap panel causality test and an asymmetric approach developed by Yılancı and Aydın (2017), which builds on Granger and Yoon (2002) and Konya's methodology. The results reveal notable nonlinearity and considerable cross-country variation. Under the symmetric specification, causality from public debt to inflation is found in only four countries. However, when asymmetry is incorporated, this number increases to twelve. Similarly, while causality from inflation to debt is observed in four countries using the symmetric model, the asymmetric framework reveals evidence in eleven countries. These findings contribute to literature by offering a comparative perspective on the debt-inflation nexus. Moreover, the results indicate the presence of cross-sectional dependence across the panel and confirm country-specific heterogeneity. The analysis of CPIA indicators also points to varied levels of institutional capacity in public debt management and revenue mobilization across the region. Notably, Kenya's top performance in revenue mobilisation suggests that robust institutional frameworks can enhance the predictive relationship between increase public debt levels and inflation. The study's findings carry significant implications for fiscal and monetary policy in sub-Saharan Africa.