Threshold Effect of Budget Deficits on Economic Growth in Ghana: An Empirical Analysis

24 Pages Posted: 9 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: July 3, 2013

Abstract

Fiscal policies in Ghana have consistently resulted in high deficits accompanied by low and uneven economic growth path for a long period of time. In this study, the author examines the threshold effect of budget deficit on economic growth in the Ghanaian case, using quarterly data from 2000–2012. The study found an inverse long run relationship between budget deficit and economic growth, especially as the deficits have often been used to finance recurrent expenditures, suggesting that high budget deficit, driven by recurrent expenditures, slows down economic growth. In the short run, however, the author found the budget deficit to promote economic growth, but a deficit beyond the threshold level of 4% of GDP was found to be detrimental to economic growth. This result was robust and supports the West African Monetary Zone’s (WAMZ) primary fiscal convergence criterion. The study therefore noted that fiscal restraint to the level below the threshold would both stimulate a sustainable economic growth and overall stability in Ghana.

Keywords: threshold, budget deficit, economic growth, vector error correction models, OLS, semi-parametric, spline regression technique, box-plot, Ghana

Suggested Citation

Akosah, Nana Kwame, Threshold Effect of Budget Deficits on Economic Growth in Ghana: An Empirical Analysis (July 3, 2013). Available at SSRN: https://ssrn.com/abstract=2289523 or http://dx.doi.org/10.2139/ssrn.2289523

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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