Fiscal deficits, output growth and inflation targets in Ghana

Abstract

Inflation appears to be the macro problem for which no antidote has been found under the Economic Recovery Programme. It is possible that either a wrong diagnosis has been made of the problem, or that certain factors within the economy are preventing inflation from staying within target levels. Using an error correction model (ECM), the paper estimates an inflation equation for Ghana. The convenience of this model is in the fact that all the data series exhibit an autoregressive scheme of order one: that is, they are I(1) series. In such an instance the Granger-Engle Theorem shows that the ECM provides the most efficient model. Further, the ECM unveils some of the short-run dynamics which are missing in other estimation techniques. The results of the econometric regression show that inflation in Ghana, either in the long run or short run, is influenced more by output volatility than by monetary factors. An examination is made of the consistency of fiscal deficit. The hypothesis is that an unsustainable fiscal policy would make government miss some macroeconomic targets. It is shown that in 1985 and 1989, fiscal policy was consistent. Inflation was well within target in 1985. For 1986–1988, the government did not maintain consistent fiscal deficits, and inflation in those years was well above targets. It is recommended that to control inflation in Ghana, more attention should be paid to supply factors. Further, government should pursue consistent fiscal policies.