Fiscal Aggregates, Private Investments and Economic Growth in Ghana. An Autoregressive Framework

The role of the private sector in promoting economic growth has long been acknowledged by early classical economists. However since the emergence of the Keynesian interventionist philosophy, there have occurred vigorous debates and arguments from time to time around which of these two paradigms offers the most effective, promising and robust momentum to achieving economic growth. This study attempts to make a contribution to the discourse by assessing the linkages between fiscal policy and private investment and ultimately how these linkages impact on economic growth in Ghana. It adopts the positivist approach to research, employing the vector autoregressive (VAR) econometric method which enables researchers to uncover the various time-dependent relationships between the variables of interests as well as separate long run from short run relationships. The study employs a seven variable VAR based on the Cobb-Douglas production function encompassing private investment, fiscal aggregates and economic growth . The empirical analysis yields evidence to the fact that in this system developed, there are two long run relationships between economic growth and the other variables on one hand and government expenditure and the rest of the variables on the other. he long run estimates from the study suggests that private investments and government expenditure positively affect growth but both borrowing modes negatively influence economic growth. Again in the long run, growth in government expenditure is positively affected by the other variables. In the short run however, economic growth is negatively influenced by government expenditure but positively by private investments whilst private investments are negatively determined by government expenditure and domestic borrowing but influenced positively by external borrowing and indirect taxes. The main recommendation from the study is that government must thoughtfully reconsider the financing avenues in order not to constrain or undermine the development of the private investments as it would appear it has a critical role in driving growth in the Ghanaian economy.