The Role of Fiscal and Monetary Policies in the Effects of Public Debt on Private Consumption in Ghana

Abstract

The study examined the role of fiscal and monetary policies in the effects of public debt on private consumption in Ghana using time series data from 1983 to 2021. Estimating the long and short-term relationships between public debt and private consumption, as well as determining the optimum threshold level of public debt on private consumption, the Autoregressive Distributed Lag (ARDL) model and the Threshold Regression approaches were used. The findings of the study indicate that there is a negative relationship between public debt and private consumption in both the short and long run. The study also found that, in the presence of direct taxes, indirect taxes, public debt significantly reduces private consumption in the short run. Also, public debt has an insignificant effect on private consumption below a threshold level of 4.836%, but beyond this level, it causes a significant reduction in private consumption. The study, therefore, recommends that the government cut down wasteful expenditures, maintains manageable levels of public debt, diversify its sources of income. Future research could analyze government policies' effectiveness in managing public debt levels and their impact on private consumption in Ghana.