Dynamics of Ghana's Twin-Deficits: Causality, Transmission Channels and Potential Threat

21 Pages Posted: 3 Jul 2013

See all articles by Nana Kwame Akosah

Nana Kwame Akosah

Research Department, Bank of Ghana; University of the Witwatersrand, Wits Business School, Students

Date Written: June 2013

Abstract

The economy of Ghana has run persistent high budget deficits in-sync with high current account deficits for over two decades. In this study, we examine the twin deficits hypothesis in the case of Ghana using quarterly data from 2000–2012. The study revealed a direct positive relationship between the twin deficits, supporting the Keynesian proposition. There is strong evidence that budget deficits drive current account imbalances and this was evidenced in the study through a feedback mechanism from external imbalances to the fiscal position, but with a lag. The persistency of government expenditure shocks were found to be the main driver for both domestic and external imbalances, confirming the heightened advocacy for fiscal consolidation. Nominal exchange rate emerged as the main conduit for fiscal effects on current account balance. The study noted that total expenditures were driven mainly by recurrent spending hence there exists potential threats to efforts at ensuring long term current account stability. Therefore, the paper suggests that successful attempts to reduce the budget deficits would help improve the current account balance and also ensure general macroeconomic stability in Ghana.

Keywords: twin-deficits hypothesis, causality, transmission channels, Ricardian equivalence, Keynesian proposition, structural vector auto-regression models, impulse response, Ghana

Suggested Citation

Akosah, Nana Kwame, Dynamics of Ghana's Twin-Deficits: Causality, Transmission Channels and Potential Threat (June 2013). Available at SSRN: https://ssrn.com/abstract=2289494 or http://dx.doi.org/10.2139/ssrn.2289494

Nana Kwame Akosah (Contact Author)

Research Department, Bank of Ghana ( email )

P.O. Box GP 2674
One Thorpe Road
Accra
Ghana
+233 267801235 (Phone)

University of the Witwatersrand, Wits Business School, Students ( email )

Johannesburg
South Africa

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