Moderating the Effect of Institutional Quality on the Fiscal Policy and Economic Growth Nexus: What Evidence Exists in Sub-Saharan Africa?

This study investigates the moderating effect of institutional quality on the fiscal policy-economic growth nexus in 38 Sub-Saharan African (SSA) countries between 2006 and 2022. This study complements the existing literature by providing the moderating effect of institutional quality on the nexus, utilizing the principal component analysis (PCA) to generate an institutional quality index that was employed in analyzing the fiscal policy-economic growth model. Utilizing the dynamic panel generalized method of moments (GMM), the study found a linear or direct fiscal policy that has a distinct positive impact on economic growth. The study found that the interaction between institutional quality and fiscal policy exerts a negative and significant effect on economic growth. This finding implies that institutional quality potentially decelerates economic growth in SSA economies. The results also demonstrate a potential feedback effect of economic growth on fiscal policy, thus validating the feedback hypothesis. While these findings were consistent with some existing studies, the study lays claim to novelty by investigating the fiscal policy-growth model and incorporating the moderating effect of institutional quality. Therefore, policies promoting improved institutions and fiscal viability in terms of resource mobilization and government expenditure should be implemented to ensure Sub-Saharan Africa's economic growth.