Can Financial Development Incur Budget Deficits? An ARDL Cointegration Analysis for Cameroon

Abstract

Previous papers investigating the structural determinants of budget deficits in panels of developing and/or developed countries either found that there exists a negative relation between financial development and fiscal balance or that the first is not a significant determinant of the later. This paper asks whether financial development is relevant to explain budget deficits within a country specific context. We use data from Cameroon between 1990 and 2021 and the ARDL bound cointegration technique. Our results show positive significant coefficients in the short-run, statistically not significant coefficients in the long-run and an ECT of – 1.48. In Cameroon, financial liberalization and financial development may lead to fiscal discipline so as to reduce budget deficits progressively. We then recommend enhancing financial development in order to improve the country’s fiscal balance management.