Fiscal aggregates, government borrowing and economic growth in Ghana: A dynamic VAR/VEC approach

Abstract

This study focused on the relationship between methods of financing government expenditures and economic growth in Ghana using a dynamic econometric framework. In the study, we developed a two equation system with economic growth and government expenditure as the endogenous variables and seven exogenous variables -domestic borrowing, borrowing from abroad, direct taxes, indirect taxes, private investment, export and imports. Stationarity tests indicated all variables were integrated of order one whilst the cointegration test uncovered one co integrating relationship between government expenditure and economic growth. Using the FIML estimation procedure, we obtained the Short run functions for both economic growth and government expenditure and showed that in the short run ,economic growth is negatively influenced by growth in domestic borrowing and growth in borrowing from abroad but positively related to growth in private investments and imports. In the Short run, growth in government expenditure elicits a positive response from growth in domestic borrowing, indirect taxes, private investments and export but inversely related to growth in borrowing from abroad and imports. Causality tests confirmed causation from government expenditure to domestic borrowing, economic growth to domestic borrowing and government expenditure to borrowing from abroad Variance decomposition shows that over ninety-nine percent of all innovations due to government expenditures emanate from ownself but economic growth accounts for about eighty-four percent of the total innovations. Shocks to government expenditure from economic growth lasts for a short period but shock of economic growth from government expenditure takes a longer time to wear out.