The Impact of Inflation, Policy Rate and Government Consumption Expenditure on GDP Growth in Ghana: A Co-Integration Approach.

Abstract

Macroeconomic variables such as Policy rate, government consumption expenditure, inflation etc. play vital roles in the economic performance of any country. The main objective of this paper was to investigate the effect that inflation, government consumption expenditure and Policy rate have on the real Gross Domestic Product (GDP) in Ghana. Data were taken from the World Bank’s World Development Indicators 2004 CD Rom.  Policy Rate data were obtained from publications and bulleting of the Bank of Ghana. Annual time series data covering the period from1980-2010 were used. In this paper we employed modern time series econometric methodology such as Unit Root Testing, Co-integration and Vector Error Correction Model (VECM) to model both the long run and short run relationships between inflation, government consumption expenditure and policy rate (independent variables) and Real GDP (dependent variable). The results of our estimates indicate positive long run relationships between inflation, and policy rate with real GDP. However government consumption expenditure has a negative impact on Real GDP in the long run. Also it was revealed that inflation and government consumption expenditure have a positive short run effect on Real GDP whereas Policy rate had an inverse relationship with Real GDP in the short run. Among the variables understudied in this paper, only inflation rate had a significant impact on the real GDP whiles Policy rate and government consumption expenditure have no significant impact on Real GDP in Ghana. It is recommended among others that the Government together with the Bank of Ghana should develop and pursue prudent monetary and fiscal policies that would aim at reducing and stabilizing both the micro and macroeconomic indicators especially inflation targeting so as to boast the growth of the economy.

Keywords: Unit Root, Co-integration, Vector Error Correction Model (VECM) Gross Domestic Product, General Government Consumption Expenditure.