The Effects of Regulatory Quality on the Pro-Cyclicality of Fiscal Policy in Countries in the Central African Economic and Monetary Community (CA EMC)

This article aims to analyze the effects of the regulatory quality on fiscal pro-cyclicality in CAEMC member countries based on the annual panel data for the years 1996 to 2016. To achieve that, we used, on the one hand, the fiscal policy reaction function (Taylor, 2000) as well as institutional quality, and on the other hand, the system-generalized method of moments (system GMM) to empirically understand the effects of the regulatory quality on fiscal pro-cyclicality in CAEMC member countries. Our findings show that the current state of regulatory quality in CAEMC countries promotes the pro-cyclicality of the fiscal policy in this sub-region. In addition, these findings show that the effect of the current state of regulatory quality on fiscal pro-cyclicality is more significant when the regulatory quality is linked to the economic cycle. It is therefore necessary to bring about profound institutional reform in the CAEMC countries in order to redirect the fiscal budget towards counter-cyclicality.


Introduction
Nowadays, the institutional quality bears great significance in an analysis of fiscal cyclicality, in the sense that institutional governance has, over the last decade or so, provided important leverage that can assist in stabilizing economic activity [1]. The debate surrounding the stabilization of economic activity is generally based on two types of trends (on the one hand those that support counter-cyclicality and on the other hand those that are opposed to counter-cyclicality).
For authors [2] [3] who are in favor of counter-cyclicality, the implemented policy must mitigate fluctuations in the economy, i.e., the implementation of an expansive policy in a period of economic slow-down and a restrictive policy during a period of growth. For critics of counter-cyclicality, a stabilizing fiscal policy must intensify economic fluctuations, that is, the implementation of a restrictive policy in periods of economic slow-down and an expansive policy during a growth period [4]. Literature shows that pro-cyclicality fiscal policies are found in developing countries while counter-cyclical fiscal policies are observed in developed countries [5].
Several theoretical models attempt to analyze the pro-cyclicality behavior of fiscal policies in developing countries. That is the case with the models of Talvi and Végh [6] and Guillaumont et al. [7]. According to Talvi and Végh [6], the pro-cyclicality nature of fiscal policies in developing countries can be explained by the fact that the tax revenues in these countries are more sensitive to external shocks. According to these authors, when the economic position is in a positive phase, governments often increase expenditure and simultaneously reduce taxes.
During a negative phase, not having amassed sufficient savings, governments now reduce expenditure and increase taxes in order to maintain economic activity.
For Guillaumont et al. [7] this approach may be linked to the fact that the principle of multilateral surveillance of fiscal policies, as implemented by the African Unions, is a factor that promotes the pro-cyclicality of government spending particularly in periods of economic recession. This led these authors to consider the modification of the rules of multilateral surveillance in order to encourage conditions that will allow accumulating budgetary surpluses during periods of expansion. Guillaumont et al. [7] perceptions coincide with the IMF's proposal which recommended that countries in the Central African Economic and Monetary Community make an effort to transition from a pro-cyclicality fiscal policy to a countercyclical policy.
Consequently, this line of thinking calls for revisiting the instruments of institutional governance in African Unions to the extent that laws and regulations constitute the foundations to abide by so that the implemented policy would deliver the desired results. One of these instruments is regulatory quality, which is considered as the indicator of the institutional quality that assesses the government's ability to formulate and implement sound policies and regulations that allow and encourage development of the private sector [8]. As such, this indicator plays a fundamental role in the sense that it permits promoting the private sector which is considered to be the key sector able to stimulate economic growth. ulatory quality on fiscal pro-cyclicality in the countries in the Central African Economic and Monetary Community (CAEMC).
In a similar vein, many authors, in particular Frankel et al. [9] demonstrated that the quality of institutional governance could be a solution to enable the transition from pro-cyclicality to counter-cyclicality in fiscal policy. An abundance of literature in the African context mainly deals with the effects of corruption, political stability [10] or even governmental efficacy [1] on the cyclical nature of fiscal policy. According to the information at our disposal, the effects of regulation on the cyclical nature of fiscal policy have apparently not yet been the topic of any specific studies. This observation simultaneously justifies our interest and choice of topic, as well as the scope of this study.
In the context of this study, we argue that regulatory quality, in its current state, amplifies the pro-cyclicality effect of fiscal policies implemented in CAEMC countries. In addition to the introduction and the conclusion, this study covers four points. The first briefly presents the relationship between regulatory quality and economic and fiscal cycles, the second offers a summary of theoretical and empirical studies, the third presents the methodological tools and the fourth presents the findings.

Overview of the Relationship between Regulatory Quality and Economic and Fiscal Cycles
The economic and financial positions of the Central African Economic and  [11].
partially related to the fact that regulatory quality has not improved. As far as Equatorial Guinea is concerned, the regulatory quality scores recorded in Graph 5 shows that this country has achieved the lowest scores of all CAEMC countries. That means that the current regulatory quality cannot contribute to reducing economic fluctuations, but on the contrary, are amplifying them.
The curves shown in Graph 6 demonstrate that for Chad the governance indicator recorded scores similar to those in other CAEMC countries. However, the scores for Chad reflect substantially better regulatory quality scores compared to the rest of the CAEMC countries.
To summarize, the position in CAEMC, as seen in the five graphs, demonstrate that the fiscal policies implemented in the countries of this sub-region appear to be pro-cyclicality as suggested by Bobbo [4]. In fact, Graphs 1-5 show the movements of the economic cycle and fiscal cycle of each country. These Regulatory quality Economic cycle Fiscal cyclicality Scores Years Graph 2. Trends in fiscal cyclicality based on the economic cycle and regulatory quality in CAMEROON. Source: Authors, using World Bank and IMF data [11].
Graph 3. Trends in fiscal cyclicality based on the economic cycle and regulatory quality in the CONGO. Source: Authors, using World Bank and IMF data [11].
Graph 4. Trends in fiscal cyclicality based on the economic cycle and regulatory quality in GABON. Source: Authors, using World Bank and IMF data [11]. Regulatory quality Economic cycle Fiscal cyclicality

Years
Graph 5. Trends in fiscal cyclicality based on the economic cycle and regulatory quality in EQUATORIAL GUINEA. Source: Authors, using World Bank and IMF data [11].
Graph 6. Trends in fiscal cyclicality based on the economic cycle and regulatory quality in CHAD. Source: Authors, using World Bank and IMF data [11].
movements are by and large positive (+), which indicates the existence of a pro-cyclicality fiscal policy. In addition, institutional governance, here expressed by regulatory quality, demonstrates that the scores in this institutional indicator are not likely to reduce the observed economic fluctuations. That implies that at this stage, regulatory quality seems to amplify fiscal pro-cyclicality in this sub-region.

Fiscal Policy Cyclicality in the Literature: What Lessons Can We Learn?
The issue of fiscal policy cyclicality remains a controversial subject. Hence a great deal of literature, both theoretical and empirical, was dedicated to the topic.
From a theoretical point of view, two arguments can be put forward, i.e. arguments in favor of counter-cyclicality of the active fiscal policy 1) and those

1) Arguments in favor of counter-cyclicality of the active fiscal policy
According to Keynesian theory [2], fixed prices and salaries do not imply a full and immediate adjustment in response to fluctuations in aggregate demand.
It follows that a countercyclical active fiscal policy helps the economy to adjust more fully and faster to such fluctuations. In other words, in accordance with its stabilizing function, fiscal policy plays an important role in the stabilization of the business cycle. In that sense, fiscal policy is intended to be counter-cyclical, that is, it must move against the business cycle in order to level it out.
It should also be noted that the leveling off of the business cycle is achieved by reducing tax rates and increasing expenditure during bad times, which leads to an increase in aggregate demand; or by reducing expenditure and increasing fiscal pressures during good times which results in a reduced aggregate demand.
By doing so, the Keynesian movement [12] [13] advocate a counter-cyclical active fiscal policy to guarantee economic well-being.
For economists such as Delong and Summers [12] or Blanchard et al. [13], it would be a mistake not to use the instruments of fiscal policy to stabilize the economy. According to the latter, in the absence of a reaction via fiscal policy, the economy is subject to frequent shocks causing inefficient fluctuations in production and employment. Likewise, they support the argument that fiscal policy stabilizes the economy. They also defend a discretionary active fiscal policy to the extent that it offers fiscal authorities the flexibility to react when faced with a number of unforeseen situations.
It should also be emphasized that a stabilizing fiscal policy could also be automatic. To this end, these automatic fiscal measures level out the economic cycle.
2) Arguments in favor of counter-cyclicality of the active fiscal policy Contrary to Keynes' theory, anti-Keynesian theories of public finance argue that a stabilizing fiscal policy does not have any positive effects on economic activity [14]. In other words, for them a stabilizing fiscal policy would prove to be destabilizing. That is due to the fact that, on the one hand, governments use fiscal policy for electoral purposes and not for the sake of regulation [15]; deficits in public finances would generally be too high, leading to strong accumulation in government debt, and on the other hand, public finance deficits would be detrimental as it would lead to an increase in tax rates, thus causing a decrease in private demand, since agents would anticipate the taxes that they would have to pay subsequently, and lower supply, due to the anticipation of the adverse effects of future taxes (theory of neutrality of fiscal policy, Barro [16]).
Thus, according to supporters of these theories, only a decrease in government spending would be an efficient macroeconomic strategy, in that it allows a decrease in taxes, which would lead to increased supply and demand [14]. In addition, a discretionary fiscal policy is limited not only because of the long delay in reaction but also by its temporal inconsistency [17]. Therefore, according to supporters of policies governed by rules, such as Kydland and Prescott [17], it is important to be wary of political processes. In addition, they are convinced that politicians make frequent mistakes in implementing the fiscal policy and what is more, that they often use it to further their own political goals. According to them, this means that only the given rules of fiscal policy can resolve the problem of inconsistency over time.
In summary, it should be noted that the anti-Keynesian theories of public finances, that argue in favor of the reduction of government spending during periods of contraction, cannot be implemented during periods of Keynesian unemployment [14]. These are more applicable in an economy with full employment, or with constrained supply where the State constantly reduces unnecessary government spending, in as far as these have hardly any basis in an economy with a demand deficit where the State temporarily implements a regulatory fiscal policy [14]. Further, the responsiveness offered by a discretionary fiscal policy is deemed inconsistent over time, which gives rise to the rule of fiscal policy in order to improve the management of public finances [17]. Of these authors, we may cite Frankel et al. [18], Adigozalov et al. [19], Caldéron et al. [20], etc. The findings of the work by Frankel et al. [18], Using the annual data for 128 countries over the period from 1970-2013, they came to the conclusion that stronger institutions have more room to maneuvre, which helps to reduce the extent of the pro-cyclicality of the fiscal policy for the majority of countries in the region. These findings call upon African policy makers to intensify institutional reform that will help them to sustainably respond to the problem of pro-cyclicality and to rebuild exchange reserves as a hedge against recessionary crises.
While the findings of the work by Frankel et al. [9], Adigozalov et al. [19] and Caldéron et al. [20] demonstrate that the transitions from pro-cyclicality to counter-cyclicality require an improvement in institutional factors, that was not the case with the work of Itchoko [10] or even Doryń et al. [1]. In fact, the findings of the studies of Itchoko [10] analyzing the influence of institutional variables on the pro-cyclicality of fiscal policy in a sample of 42 countries in Sub-Saharan Africa demonstrated that even when taking institutional factors into account, corruption intensifies the pro-cyclicality of the fiscal policy while a democracy contributes to a decrease in pro-cyclicality.
Like Itchoko [10], Doryń et al. [1] also obtained mixed findings. Examining the relationship between institutional factors and the implementation of the fiscal policy over the course of the economic cycle, using a worldwide sample of 182 countries over the period 1995-2015, Doryń et al. [1] found statistical evidence to support that anti-cyclical fiscal policies are implemented not only by countries with stable institutions, but also by those where the institutional background is weak. However, the breadth of the fiscal policy response to a production gap differs from one country to another. This scope is much wider in advanced countries and less pronounced in developing countries.
This empirical review highlights controversial opinions with regard to the relationship between the institutional quality and the cyclical nature of the fiscal policy. It should also be admitted that the more stable the institutions are, the more likely it is that the fiscal policy will be counter-cyclical and vice versa.

Model Specifications and Assessment Procedure
The cyclicality of the fiscal policy is generally captured by the State's reaction function in formulating its fiscal policy. Drawing on the approach of Taylor [22], the rules of national fiscal policy state that net government spending is, on the one hand, influenced by the economic cycle (automatic stabilizers) and on the other hand, by discretionary fiscal policy decisions. In addition, it is necessary to introduce a shock likely to influence net government spending in an unpredictable way. Hence the following formula: By taking into account the sustainability constraint on government debt, Equation (1) can be written as: In reference to the work of Frankel et al. [18], Caldéron et al. [20] and Doryń et al. [1], institutional quality becomes an important variable in explaining the cyclical behavior of fiscal policy. Hence Equation (2) becomes: It should be pointed out that Our equation, specifically for estimation purposes, as in the case of Doryń et al. [1] is the following: With it CGE the cyclical component of total government spending. According to Itchoko [10] this corresponds to the gap between total government spending (the observed level of total government spending and its trend level) compared to its trend level. It captures the cyclicality of the fiscal policy. Blundell and Blond [28] following Arellano and Bover [29] proposed the System GMM as a solution that involves the simultaneous estimation of the first difference equation associated with the level equation. Their model generates efficient dynamic panel estimators for analyses involving coefficients over short periods (T is small). The System GMM is much more efficient than the Difference GMM.
Assessing the relevance of this instrumentation method requires the validation of the Sargan/Hansen over-identification tests and the absence of auto-correlation of second-order errors. In addition, unlike the Sargan test, Hansen's test is robust to the heteroskedasticity of error terms.

Data
Annual data on the fiscal policy indicator (total government spending) as well as those on debt, total public debt as a percentile of GDP, and on inflation, captured by the GDP deflator come from the IMF's World Economic Outlook (WEO) database. The cyclical components of total government spending that we have used were obtained by the difference between total government spending compared to its trend level. Additionally, the trend level is obtained using the Annual data on the indicator of institutional quality came from the World Bank's World Governance Indicators (WGI) database, according to the methodology of Kaufmann et al. [30]. As far as the indicator value (DUM) is con- The table below gives the main variables used in the context of this study. Table   1 shows a wide spread of values around the mean for all variables except regulatory quality and inflation. In fact, the standard deviation of all distributions (variables) is higher than the mean obtained except in the case of regulatory quality and inflation.  (2) and (4)   the ongoing year. This implies that the current state of regulatory quality encourages the pro-cyclicality of the fiscal policy. In addition, this effect is more pronounced when regulatory quality is related to the economic cycle (1.239). These findings allow us to retain the teaching that the regulatory quality is an enhancer of the pro-cyclicality of fiscal policy in CAEMC member countries.

Estimation Findings and Discussion
In fact, the pro-cyclicality nature of the fiscal policy appears to be amplified by regulatory quality in CAEMC member countries. This finding is in line with the work of Adigozalov et al. [19] and Calderon et al. [5], which demonstrate that institutional quality reinforces the pro-cyclicality of fiscal policy in developing countries. These studies suggest that countries with weak institutions tend to increase the degree of pro-cyclicality of fiscal policy. However, the findings of these studies were qualified by Doryń et al. [1] for developing countries with weak institutions. This author showed that these countries adopted small-scale countercyclical policies.
Contrary to Doryń et al. [1], Itchoko [10] came to mixed conclusions, findings that suggest that, on the one hand, corruption reinforced fiscal pro-cyclicality and on the other hand that democracy reduced fiscal pro-cyclicality in Sub-Saharan African countries.
The findings obtained for CAEMC member countries confirm the existence of a link between regulatory quality and the pro-cyclicality of fiscal policies in developing countries, oil producers. The low regulatory quality in these countries will reinforce the pro-cyclicality of fiscal policies; this confirms the point of view put forward at the beginning of this study. The theoretical body of work that supports anti-Keynesian effects suggests that governments, in the background of CAEMC, would use fiscal policy for electoral purposes and not for regulatory purposes, leading to pro-cyclical fiscal policies. The findings of this study also suggest that it is essential to improve institutional quality in CAEMC member countries in order to improve the state of public finances via the adoption of counter-cyclical fiscal policies.

Conclusions and Implication of Economic Policies
The purpose of this study was to examine the effects of regulatory quality on the pro-cyclicality of fiscal policies in CAEMC member countries. To do that, we used a sample of 126 observations in panel data from six (06) CAEMC member countries. Furthermore, on the one hand, we used the State's reaction function via fiscal policy [22] in addition to institutional quality and on the other hand, with the system generalized method of moments (System GMM). The findings obtained teach an important lesson, namely: regulatory quality in CAEMC member countries is such that it reinforces fiscal policy pro-cyclicality. In addition, the findings obtained suggest that the effect of regulatory quality on fiscal policy pro-cyclicality is more significant when regulatory quality is linked to the economic cycle.
These findings imply that a transition from pro-cyclical fiscal policies to counter-cyclical fiscal policies, as recommended by the IMF during the meeting of July 2016 in Malabo, requires the implementation of substantial reforms to improve institutional quality. It is only on this condition that CAEMC member countries can improve the state of their public finances and above all, reduce the vulnerability of their economies to shocks affecting oil prices. Specifically, the improvement of regulatory quality encourages a business climate which in turn allows growth in the private sector and stimulates job creation. All of these contribute to achieving counter-cyclical fiscal policies in the CAEMC member countries.

Annexes
Estimation findings for GMM-Sys estimator without Hansen test.