Macroeconomic impact of fiscal policy in Ghana: Analysis of an estimated DSGE model with financial exclusion

Paul Owusu Takyi and Roberto Leon-Gonzalez

Economic Analysis and Policy, 2020, vol. 67, issue C, 239-260

Abstract: This study develops and estimates a standard New-Keynesian DSGE model for the Ghanaian economy, for the analysis of the impacts of fiscal policy shocks on key macroeconomic variables. It also applies the model to examination of the effects of government spending, consumption tax, and labor income tax shocks on household consumption and working hours. The model features heterogeneous households of two types, financially excluded and financially included, and considers two labor markets: perfectly and monopolistically competitive labor markets. We use quarterly time series data from 1985Q1–2017Q4 to estimate the model’s parameters through Bayesian approach. Overall, we find that increased government spending has positive effects on consumption, output, employment and inflation while it turns to crowd-out consumption and to dampen the expansionary effect on output when wages are sticky. Our policy experiment results show that the presence of sticky wage dynamics in the economy requires large fraction (75%) of households who cannot participate in the financial markets in order to generate a rather short-lived positive consumption multiplier of government spending shock. At the disaggregated level, we find that positive consumption and labor income tax shocks decrease consumption by financially excluded households more than that by financially included ones. We also find that whereas financially included households decrease their working hours, financially excluded households increase their working hours in order to mitigate the negative effects of those shocks on their consumption.

Keywords: Fiscal policy; Financial exclusion; DSGE modeling; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E32 E62 H20 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Macroeconomic Impacts of Fiscal Policy in Ghana: Analysis of an Estimated DSGE Model with Financial Exclusion (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:67:y:2020:i:c:p:239-260

DOI: 10.1016/j.eap.2020.07.007

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