Modeling Gdp Using Vector Autoregressive (Var) Models: An Empirical Evidence From Ghana.

ABSTRACT

This study used the VAR models to model the Growth Domestics Products (GDP) of Ghana

with other two selected macroeconomic such as inflation and real exchange rate for the

period of 1980 to 2013. Data were taken from the World Bank’s World Development

Indicators and Bank of Ghana. This study employed co-integration test and vector error

correction models (VECM) to examine both long-run and short-run dynamic relationships

between the GDP and the macroeconomic variables. The time series properties of the data

were, first, analysed using the Augmented Dickey-Fuller (ADF) test. The empirical results

derived indicate that all the variables were stationary after their first differencing; i.e.

variables are integrated of order one, I(1). The study further established that there is cointegration

between macroeconomic variables and GDP in Ghana indicating long run

relationship. The VECM (3) model was appropriately identified using AIC information

criteria with co-integration relation of exactly one .The above long term relation indicates

that Real Exchange Rate have a negative effect on GDP whiles Inflation (CPI) showed a

positive effect on GDP. The study further investigated the causal relationship using the

Granger Causality analysis, which indicates a uni–directional causal relationship between

GDP and Real Exchange rate and bi-directional causal relationship between GDP and

Inflation rate at 5%. Hence the findings that inflation has a long-run relationship between

GDP growth and influences it positively in Ghana, government should invest in local

industries to boost domestic production of tradable which would maintain higher export

volumes. This will help reduce Exchange rate and hence impact on inflation, thereby

increasing GDP growth rate.