Fiscal deficit financing is confirmed in both theoretical and empirical literature to often lead to higher-than-expected inflation. The unsustainable regime of fiscal deficit financing in Ghana over the years had contributed to price in stability in Ghana. Previous studies on deficit financing-inflation nexus in Ghana concentrated completely on linear and symmetric relation while ignoring the effect of regime of fiscal deficit financing on inflation. This study investigated the regime of fiscal deficit financing and its effects on inflation dynamics in Ghana over the 1980-2018 period. The Theory of Fiscal Price Level (TFPL) was adopted as the theoretical framework for the study. The TFPL highlighted the macroeconomic consequences of fiscal dominance over monetary policy actions and how it impacts on price stability due to the financing of government fiscal deficit in a country. The study employed Markov-Switching Regime Dynamic Model (MSRDM) to investigate the regime effects of fiscal deficit financing on inflation. The study revealed the presence of two fiscal regimes in Ghana and that the regime of fiscal deficit financing remained persistent over the study period. The paper further found that fiscal deficit financing had a stronger effect on inflation dynamics in Ghana in the higher regime of fiscal deficit financing while its impact on inflation in the lower regime of fiscal deficit financing remained relatively subdued. The paper recommends that the government of Ghana should adopt fiscal policy actions that could lead to the achievement and maintenance of fiscal sustainability and consolidation consistent with a low inflation regime going forward.
KeywordsFiscal Deficit FinancingInflation DynamicsRegime EffectTheory of Fiscal Price Level
Acquah-Sam, E. (2017). Influencers of Inflation in Ghana. European Scientific Journal, 13, 140-158. https://doi.org/10.19044/esj.2017.v13n7p140
Adu, G., & Marbuah, G. (2011). Determinants of Inflation in Ghana: An Empirical Investigation. South African Journal of Economics, 79, 251-269. https://doi.org/10.1111/j.1813-6982.2011.01273.x
Agha, A. I., & Khan, M. (2006). An Empirical Analysis of Fiscal Imbalances and Inflation in Pakistan. SBP Research Bulletin, 2, 344-362.
Ahiakpor, F. (2014). Rethinking about Determinants of Inflation in Ghana: Which Econometric Model Tell the True Story. European Journal of Business and Management, 6, 78-86.
Ahking, F. W., & Miller, S. M. (1985). The Relationship between Government Deficits, Money Growth and Inflation. Journal of Macroeconomics, 7, 447-467. https://doi.org/10.1016/0164-0704(85)90036-9
Alagidede, P. (2016). Central Bank Deficit Financing in a Constrained Fiscal Space (pp. 1-14). International Growth Centre (IGC) Working Paper Series, S-33306-GHA-1.
Alagidede, P., Coleman, S., & Adu, G. (2014). Regional Analysis of Inflation Dynamics in Ghana (pp. 1-32). International Growth Centre (IGC) Working Paper Series.
Aviral, K. T., Süleyman, B., & Ozgür, K. (2015). Revisit the Budget Deficits and Inflation: Evidence from Time and Frequency Domain Analyses. Theoretical Economics Letters, 5, 357-369. https://doi.org/10.4236/tel.2015.53041
Barnhart, S. W., & Darrat, A. F. (1988). Budget Deficit, Money Growth and Causality: Further OECD Evidence. Journal of Macroeconomics, 7, 447-467. https://doi.org/10.1016/0261-5606(88)90018-6
Bawumia, M., & Abradu-Otoo, P. (2003). Monetary Growth, Exchange Rates and Inflation in Ghana: An Error Correction Analysis (pp. 1-35). Bank of Ghana Working Paper Series, BOG-2003/05.
Bawumia, M., & Atta-Mensah, J. (2005). A Simple Vector-Error-Correction Forecasting Model for Ghana (pp. 1-30). Working Paper Series, BOG-2003/01.
Blinder, A. S. (1983). On the Monetization of Deficits. In L. H. Meyer, Ed., The Economic Consequences of Government Deficits (pp. 39-73). Springer. https://doi.org/10.1007/978-94-009-6684-0_3
Bliss, R. R., & Kaufman, G. R (2002). Bank Procyclicality, Credit Crunches, and Asymmetric Monetary Policy Effects: A Unifying Model (pp. 1-25). Federal Reserve of Chicago, Working Paper, WP 2002-18. https://doi.org/10.2139/ssrn.367166
Carlos, V. (2000). Are Fiscal Deficits Inflationary? Evidence for the EU (pp. 1-16). Economic Research Paper 00/7, Loughborough University.
Cedula, R. J. (2000). Impact of Budget Deficits on Ex-Post Real Long-Term Interest Rates. Applied Economics Letters, 7, 177-179. https://doi.org/10.1080/135048500351744
Cover, P. J. (1992). Asymmetric Effects of Positive and Negative Money-Supply Shocks. The Quarterly Journal of Economics, 107, 1261-1282. https://doi.org/10.2307/2118388
Dadson, Y. A. (2015). Examining the Effects of Fiscal Deficits on Inflation in Ghana (pp. 1-94). Unpublished MPhil Thesis, Economics Department University of Ghana.
Darrat, A. F. (2000). Are Budget Deficits Inflationary? A Reconsideration of the Evidence. Applied Economics, 7, 636-663. https://doi.org/10.1080/135048500415914
Dharmendra, D., Kandil, M., Sharam, S. C., & Trescott, P. B. (1994). Determinants of the Inflation Rate in the United States: A VAR Investigation. The Quarterly Review of Economics and Finance, 34, 95-112. https://doi.org/10.1016/1062-9769(94)90055-8
Dolado, J. J., & Maria-Dolores, R. (2006). State Asymmetries in the Effects of Monetary Policy Shocks on Output: Some New Evidence for the Euro-Area. Contributions to Economic Analysis, 276, 311-331. https://doi.org/10.1016/S0573-8555(05)76012-0
Dwyer, G. P. (1982). Inflation and Government Deficits. Economic Inquiry, 20, 315-329. https://doi.org/10.1111/j.1465-7295.1982.tb00350.x
Favero, C. A., & Spinelli, F. (1999). Deficits, Money Growth and Inflation in Italy. Economic Notes, 28, 43-71. https://doi.org/10.1111/1468-0300.00004
Friedman, B. M. (1968). The Role of Monetary Policy. American Economic Review, 58, 1-17.
Ghartey, E. E. (2001). Macroeconomic Instability and Inflationary Financing in Ghana. Economic Modelling, 18, 415-433. https://doi.org/10.1016/S0264-9993(00)00047-X
Giannaros, D. S., & Kolluri, B. R. (1986). Deficit Spending, Money, and Inflation: Some International Empirical Evidence. Journal of Macroeconomics, 7, 401-417. https://doi.org/10.1016/0164-0704(85)90079-5
Hamburger, M. J., & Zwick, B. (1981). Deficits, Money and Inflation. Journal of Monetary Economics, 7, 141-150. https://doi.org/10.1016/0304-3932(81)90057-X
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57, 57-84. https://doi.org/10.2307/1912559
Hamilton, J. D. (1990). Analysis of Time Series Subject to Changes in Regime. Journal of Econometrics, 45, 39-70. https://doi.org/10.1016/0304-4076(90)90093-9
Hondroyiannis, G., & Papapetrou, E. (1997). Are Budget Deficits Inflationary? Applied Economics Letters, 4, 493-496. https://doi.org/10.1080/758536632
Karras, G., & Stokes, H. H. (1999). Why Are the Effects of Money-Supply Shocks Asymmetric? Evidence from Prices, Consumption, and Investment. Journal of Macroeconomics, 21, 713-727. https://doi.org/10.1016/S0164-0704(99)80003-2
Keynes, J. M. (1936). The General Theory Money-Wage and Prices. Cambridge University Press. Book 5, Chapter 19, 20 and 21: 255-310.
Kurayish, S., & Bbaale, E. (2019). Budget Deficit and Inflation Nexus in Uganda 1980-2016: A Cointegration and Error Correction Modelling Approach. Journal of Economic Structures, 8, 2-14. https://doi.org/10.1186/s40008-019-0136-4
Lemgruber, A. C. (1980). Expectativas racionais e o dilema produto real/inflacao no Brasil. Revista Brasileira de Economia, 34.
Loungani, P., & Swagel, P. (2003). Sources of Inflation in Developing Countries (pp. 207-232). Cambridge University Press. https://doi.org/10.1017/CBO9780511610141.010
Nelson, N. C. (2015). The Effects of Budget Deficits on Selected Macroeconomic Variables in Nigeria and Ghana. Asian Economic and Social Society, 5, 167-180.
Ocran, M. K. (2007). A Modelling of Ghana’s Inflation Experience: 1960-2003. Studies in Economics and Econometrics, 31, 119-144. https://doi.org/10.1080/10800379.2007.12106424
Ogunsakin, S., & Olalere, S. S. (2017). Nexus between Inflation and Budget Deficit: A Comparative Study between Nigeria and South Africa. International Journal of Economics, Commerce and Management, 5, 98-112.
Osei, V. (2014). Inflation Dynamics in Ghana. Journal of International Finance and Banking, 2, 38-58. https://doi.org/10.5296/ifb.v2i1.7913
Osei, V. (2016). Managing Interest Rate Spreads in Ghana: Some Policy Discussion. Journal of Economics and Sustainable Development, 7, 16-31.
Protopapadakis, A. A., & Siegel, J. J. (1987). Are Money Growth and Inflation Related to Government Deficits? Evidence from Ten Industrialized Economies. Journal of International Money and Finance, 6, 31-48. https://doi.org/10.1016/0261-5606(87)90011-8
Rhee, W., & Rich, R. (1995). Inflation and the Asymmetric Effects of Money on Output Fluctuations. Journal of Macroeconomics, 17, 683-702. https://doi.org/10.1016/0164-0704(95)80089-1
Sowah, N. K. (1994). Fiscal Deficits, Output Growth and Inflation Targets in Ghana. Journal of Emerging Trends in Economics and Management Sciences (JETEMS), 22, 1105-1117. https://doi.org/10.1016/0305-750X(94)90079-5
Sowah, N. K., & Acquaye, I. (1999). Financial and Foreign Exchange Markets Liberalization in Ghana. Journal of International Development, 11, 385-409. https://doi.org/10.1002/(SICI)1099-1328(199905/06)11:3 3.0.CO;2-P
Sowah, N. K., & Kwakye, J. (1993). Inflationary Trends and Control in Ghana. Africa Economic Research and Consortium Research Report, 22, 1-31.
Woodford, M. (1994). Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy. Economic Theory, 4, 345-380. https://doi.org/10.1007/BF01215377