Does Fiscal Illusion Impact Budget Policy? A Panel Data Analysis

Abstract

This study employs a panel data analysis to examine the relationship between fiscal illusion and budget policy of 15 African countries over the period between 1980 and 2012. The empirical results of the test of Hausman suggest the use of fixed effects estimators. But to check the robustness of the empirical results in different econometric specifications we have also conducted many regressions using alternative estimation methods (such as random effect and population averaged models). Empirical results obtained show a positive and significant association between fiscal illusion and public deficit. An increasing of 1 percent of fiscal freedom leads respectively to, ceteris paribus, an augmentation of 0.27, 0.24 and 0.3 percent of budget deficit in the fixed, random and population method. As a conclusion, fiscal illusion affects budget policy. Keywords: Fiscal illusion; Public deficit; Public debt; Government policy; Panel data JEL Classifications: C33; E62; O38