Does Government Fiscal Policy in Ghana Asymmetrically Affect Growth?

Abstract

Using ARDL and NARDL approaches, this study examines whether government fiscal policy symmetrically or asymmetrically impact economic growth in Ghana from the period 1988 to 2018. The study outcome reveals that fiscal policy variables used exhibited long-run cointegration with economic growth for both ARDL and NARDL models. Government tax revenue, expenditure and labour showed a strong positive and significant impact on economic growth whilst capital had a significant but inverse effect on economic growth in the long-run for ARDL. NARDL model shows that positive shocks of government tax revenue exerted much impact on growth rate compared to its negative shocks in both long and short run. Estimations form the long-run suggested that positive shocks of government expenditure increase growth rate whereas the negative shocks decrease growth. The Granger test, from the NARDL model, showed a Uni-directional causation moving from LNEXP_NEG→LNGDP, LNTR_NEG→LNGDP, LNTR_POS→LNGDP while a bi-directional causality is recorded for LNEXP_POS→LNGDP and LNLAB→LNGDP. In the ARDL model bi-directional causality is recorded from LNEXP→LNGDP, LNTR→LNGDP and LNLAB→LNGDP. The research then concludes with a strong asymmetric relationship between fiscal policy and economic growth. Recommendations raised are that government should avoid raising taxes but should look for policies that will help widen its tax revenue base and in financing projects government should avoid unproductive projects that do not yield economic growth.