Regime Effects of Fiscal Deficit Financing and Inflation Dynamics in Ghana: A Recent Study

Abstract

In both theoretical and empirical literature, it has long been recognized that funding fiscal deficits generates inflation. Ghana's fiscal deficit financing policy has contributed to price instability in the country over the years. In Ghana, studies on the deficit finance-inflation nexus focused solely on linear and symmetric relationships, ignoring the impact of the fiscal deficit financing system on inflation. This study investigated the regime of fiscal deficit financing and its impact on inflation dynamics in Ghana over the 1980-2018 period. The Theory of Fiscal Price Level (TFPL) was adopted as the theoretical framework for the study. The study employed Markov-Switching Regime Dynamic Model (MSRDM) to examine the regime effects of fiscal deficit financing on inflation. The study discovered that Ghana has two fiscal regimes, with the fiscal deficit financing regime being constant throughout the study period. The report also discovered that fiscal deficit financing had a bigger impact on inflation dynamics in Ghana in the higher regime, whereas its impact on inflation in the lower regime was rather subdued. The paper suggests that Ghana's government take fiscal policy initiatives that will allow it to achieve and maintain budgetary sustainability and consolidation in the future while maintaining a low inflation rate.