Can Fiscal Policy Stabilise Ghana’s Economy? Evidence from Government Spending and Tax Multipliers
DOI:
https://doi.org/10.53819/81018102t3193Abstract
This study assesses the effectiveness of discretionary fiscal policy in stabilising Ghana’s economy, using 164 quarterly observations over the period 1980–2020 to estimate a structural vector autoregression (SVAR) model that serves as the fiscal block of a larger macroeconometric system. All data were obtained from official sources. An increase in government spending produces an initial output multiplier of 0.30, reaches a peak of 0.45 in the second year and has a cumulative multiplier of 1.10 after four years. Likewise, a reduction in net taxes generates an initial multiplier of 0.25, a third-year peak of 0.35 and a fourth-year cumulative multiplier of 0.90. However, spending increases and tax cuts raise inflation by 0.5 and 0.3 percentage points, respectively. In addition, an increase in the budget deficit raises reserve-money growth and inflation, reflecting interaction between the fiscal authority and the central bank. Therefore, fiscal policy can help stabilise output, but its effectiveness depends on the type of government spending, how it is financed, the available fiscal space and the degree of monetary accommodation. Productive government spending, revenue mobilisation and credible fiscal institutions are needed to achieve sustainable growth while maintaining price stability and containing public debt risks.
Keywords: Fiscal Policy, Government-Spending Multiplier, Tax Multiplier, Macroeconomic Stabilisation, Fiscal Shocks, Ghana
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