Regime Effects of Fiscal Deficit Financing and Inflation Dynamics in Ghana: A Recent Study

It has long been understood in theoretical and empirical literature that financing fiscal deficits causes inflation. Price volatility in Ghana has been a result of Ghana’s fiscal deficit financing policies over time. Studies on the link between deficit finance and inflation in Ghana ignored the effect of the fiscal deficit financing system on inflation in favour of linear and symmetric correlations. This study looked at Ghana’s inflation patterns between 1980 and 2018 under the fiscal deficit financing framework. The study’s theoretical foundation was the Theory of Fiscal Price Level (TFPL). The Markov-Switching Regime Dynamic Model (MSRDM) was used in the study to investigate the impact of fiscal deficit financing on inflation regimes. According to the report, Ghana has two fiscal systems. with the fiscal deficit financing structure remaining constant during the course of the research. The analysis also found that, while its effect on inflation in the lower regime was relatively muted, fiscal deficit financing had a greater impact on Ghana’s inflation dynamics in the higher regime. The report makes recommendations for the government of Ghana to implement fiscal policy changes that will enable it to achieve and maintain long-term budgetary sustainability and consolidation while preserving a low inflation rate.

Author(s) Details:

Victor Osei,
Research Department, Bank of Ghana, Accra, Ghana.

E. Olawale Ogunkola,
Faculty of Economics and Management Sciences, University of Ibadan, Ibadan, Nigeria.

Please see the link here:

Keywords: Fiscal deficit financing, inflation dynamics, regime effect, theory of fiscal price level, markov switching, regime probability, regime duration.

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