Budget Deficits, Monetary Accommodation and Inflation-Output Dynamics in Ghana

This study examines how fiscal policies interact with monetary policies using the dynamic behaviour of a reduced-form vector autoregression (VAR), as opposed to using structural impulse responses or fiscal multipliers. Using data from 164 quarterly observations over the period 1980Q1–2020Q4, the study assesses four equations for inflation, the policy interest rate, broad money and international reserves. An increase in the previous quarter’s budget deficit raises current inflation by 0.017655 (p = 0.017), an increase in net taxes lowers inflation (−0.021496, p < 0.001), and an increase in real GDP growth raises inflation (0.014086, p < 0.001). Government expenditure lagged two quarters is associated with a lower policy rate (−0.613298, p = 0.038), which indicates accommodative monetary policy. However, the budget deficit has no statistically significant effect on broad money (p = 0.975), and there is only weak evidence that it affects international reserves (p = 0.095). Therefore, monetary accommodation in Ghana is indirect and selective, operating through the policy rate, reserves and financing conditions rather than through the automatic conversion of deficits into broad money. Keywords: Budget Deficits, Monetary Accommodation, Inflation Persistence, Broad Money, Ghana