The Transmission Shock Effect of Fiscal Deficit Financing and Inflation Dynamics in Ghana

Fiscal deficit financing has remained a major monetary policy concern for Ghana for a couple of years, which caused macroeconomic instability including high inflation episodes in the history of Ghana’s economy as far back as 1980. This article critically examined the shock effects of fiscal deficit financing-inflation dynamics transmission mechanism in Ghana for 1980 to 2018 period. The theoretical framework adopted for this study is based on the fiscal theory of the price level. The methodology employed for this article was the structural vector autoregression. The study found that monetary expansion contributed 26.0% to inflation variability, whereas monetization contributed 24.0%. Similarly, the article suggested that external financing contributed 6.1% to inflation, whereas domestic financing of government fiscal budget posed a significant inflation risk. The article recommended that prudent fiscal policies should be implemented by authorities in order to ensure debt sustainability and price stability as well.