Examining The Effects Of Fiscal Deficits On Inflation In Ghana

ABSTRACT

Inflation is a major macroeconomic issue in Ghana, although there have been times when it seemed to have been managed. This is evident in the periods such as June 2010, when Ghana attained a single-digit of 9.5%. However, there appears to be a fundamental problem in the management of inflation, in other words, inflation seem not to be tractable. The evidence from many studies conducted on inflation indicated that the causes of inflation are many and varied. However, the main thrust of this study is to examine the impact of fiscal deficit on the inflationary trends in Ghana. Nevertheless, other explanatory variables, such as the Treasury bill rate, real exchange rate and real GDP were included. The study period spans from the period 1983 to 2013. The time series properties of the underlying series were examined using the Augmented Dickey Fuller and the Philip-Perron unit root tests. Using the Autoregressive Distributive Lag (ARDL) model, the long and short-run models were estimated, and the Granger Causality test was employed to test for causality between the variables. The results suggested a positive relationship between fiscal deficits and inflation in the long-run. The Granger causality test supported a unidirectional causality from fiscal deficits to inflation. In conclusion, this study revealed that inflationary pressures for the period 1983 to 2013 were predominantly a monetary phenomenon. The fiscal deficit component with its corresponding financing was observed to be a major determinant of inflation in Ghana hence emphasizing the prominence of the fiscal theory of the price level in the explanation of inflation in Ghana. A major recommendation from the conclusions is that fiscal and monetary policies must be properly formulated and implemented to address the problem of inflation in Ghana.