The relevance of domestic and foreign factors in driving Ghana’s business cycle

Abstract

It is commonly assumed that external shocks dominate economic fluctuations in least-developed countries (LDCs), particularly commodity-exporting LDCs. Nonetheless, the magnitude and extent of the impact of such shocks compared to other domestic drivers of the business cycle in these countries remain unclear. This study employs a business cycle accounting model to empirically explore the relative contributions of domestic and external factors to Ghana’s post-independence business cycle. Contrary to widely held beliefs, our results suggest that external factors do not exert a predominant influence on Ghana’s business cycle. Instead, Ghana’s business cycle is driven largely by productivity shocks (or efficiency wedges), with the 1980s recession being an exception (which was largely driven by investment wedges). Furthermore, we also show that it is better to capture Ghana’s 2011 oil boom as a productivity shock rather than a government spending or an external shock (as some have done) when building a model of economic fluctuations for Ghana’s economy for that episode of the business cycle. These results have important implications for building models of economic fluctuations for Ghana’s economy.