Macroeconomic instability and inflationary financing in Ghana

Two co-integrated relations exist among macroeconomic variables. A class of vector error correction model has been estimated, identified and used to s tudy policy implications. Although the budget deficit as a percentage of GD P was permanently reduced by improvements in financial intermediation, it w as increased by changes in monetary policy, transactions, devaluation polic y and inflation. Granger causality, impulse response functions, vector deco mpositions and sensitivity analysis showed budget deficits as a share of GD P to be inflationary, and were indirectly financed by base money through mo ney printing; inflation was monetized, self-sustaining, and retarded econom ic growth. (C) 2001 Elsevier Science B.V. All rights reserved.