Economic Growth in Ghana: A Vector Error Correction Model (VECM) Approach from 1970-2015

Abstract

Time series datasets was collected from 1970-2015 to empirically test for the factors that drive economic growth in Ghana using a cointegration analysis and a Vector Error correction modeling(VECM). The findings were that growth of output is driven by exports and government spending which are both statistically significant as well. Oil rent, mineral rent, investment and household consumption expenditure do not drive long run growth of output in the period understudy. Amongst the latter, oil rent, investment and consumption are statistically significant except for mineral rent which is not. Since export is a notable driver of growth in the long run, it is vital to look at the exposure of our exports commodities (gold, cocoa and oil) to external shocks, perhaps finding measures to limit the revenue shortfalls due to the shocks/volatilities will be a step to sustain the growth potentials of the economy. With government spending being statistically significant a contributor to longrun growth, government is encouraged to practice the Keynesian type so as to stimulate domestic demand.