Abstract
ABSTRACT This paper investigates the impact of public debt on inflation in Ghana using annual data during the period 1983–2018. The study uses the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration and an error correction model to examine this linkage. The cointegrating regression results reveal evidence of a stable long-run relationship between inflation and the explanatory variables in the presence of a structural break. The findings also show a positive and significant impact of public debt on inflation. These results were found to hold, irrespective of whether the regression was conducted in the short run or in the long run. The study confirms the presence of the inflationary effects of public debt in Ghana. The government should, therefore, be prudent when considering increases in public debt to minimize volatility in inflation and its associated risks to the economy.
Highlights
The control of inflation dynamics is vital to the monetary and fiscal policy objective
The long-run and short-run results presented in Table 4 (Panel A and Panel B) show that the coefficient of public debt is positive and statistically significant, irrespective of the period. These results suggest that public debt plays a significant role in the process of inflation levels in Ghana, regardless of whether it is in the long run or in the short run
The main objective of this study was to examine the relationship between public debt and inflation in Ghana using annual data from 1983 to 2018
Summary
The control of inflation dynamics is vital to the monetary and fiscal policy objective. Given the significant role that public debt plays in fiscal deficit financing, the relationship between public debt and inflation has emerged as a topical issue in recent decades. According to Sims (2013, 2014, 2016), persistent and growing fiscal deficit finance through government borrowings will eventually produce inflationary pressures, regardless of the policies followed by the Central Bank. Debt-financed deficits will require effective coordination with the monetary authority to avoid high and unstable inflation rates that may be harmful to macroeconomic stability. More so, according to Aimola and Odhiambo (2018), the effectiveness of monetary policy in controlling inflation critically depends on its coordination with fiscal policy, suggesting that granting Central Bank autonomy in the hope that it will insulate an economy from having to accommodate imprudent fiscal policies, may not be successful at curbing inflation. The Fiscal Theory of the Price Level (FTPL), as embedded in the non-Ricardian policy shows that fiscal authority alone can dominantly influence inflation irrespective of monetary policy
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