Fiscal deficit, money growth and inflation dynamics in Ghana
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Date
2015-04-28
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Abstract
The issue of inflation has attracted a great deal of attention over the past two decades, as
reflected in substantial academic literature. The objective of the study was to investigate the
causal relationship between fiscal deficits, money growth and inflation, having controlled for
macroeconomic variables such as interest rate, exchange rate and real GDP in the Ghanaian
economy for the period 1960-2012 and to test whether the Sargent Wallace Hypothesis holds
for the Ghanaian economy. The time series properties of the underlyin g series were examined
using the Argumented Dickey Fuller and the Philip Perron unit root tests and the result reveals
that the interaction between fiscal deficit and money supply, fiscal deficit, money supply, were
all stationary at the levels, while other incorporated variables in the empirical analysis- real
income and the nominal exchange rate -were stationary at first difference. Using the
autoregressive distributive lag model the long and short run models were estimated, and the
Granger Causality test was employed to test for causality among the variables. The results
suggest a positive relationship between fiscal deficits and inflation in the Ghanaian economy
occurs only in the short run; however the money supply shows a consistent positive relationship
with inflation, both in the short and long run. This supports the position that in the long run,
inflation is mainly driven by monetary expansion. The Granger causality test supported a
unidirectional causality from fiscal deficit to inflation and money supply; and a bi-directional
causality existing between money supply and inflation. The results indicated that the best
approach to understand the causal relationship between fiscal deficit, money supply and inflation
in the Ghanaian economy in the long run is given by the SW-H. The study suggested policies
which aimed at properly formulating and implementing good monetary and fiscal policies.
Description
A thesis submitted to the Department of Economics, in partial
fulfillment of the requirement for the award of
Master of Philosophy degree in Economics,