A development-oriented macroeconometric model of Ghana (dynamic simulation, policy analysis and forecasting)

The major economic difficulties facing Ghana are low economic growth, persistently high inflation and unemployment rates, declining per capita income, huge balance of payments deficits and heavy external indebtedness. In order to address these contemporary problems, an internally consistent macro framework is indispensable. The IMF and the World Bank models are used for policy discussion, forecasting, and program lending negotiations in Ghana. The main weaknesses of the Fund Model are that it assumes a constant velocity of money, it is static, and is concerned only with short-term monetary explanation of BOP difficulties. The Bank Model assumes two gaps, and lacks prices, employment, public finance and monetary sectors.;In view of the respective strengths and weaknesses, efforts by many researchers have gone into the merger of the two models. After having reviewed the relevant economic modelling literature, and the major thread that runs through the various types of the merged Fund-Bank models, we divide our macro system into eight sectors: aggregate expenditure to bring out savings gap, the multiplier, and related concepts; government finance to address fiscal gap, pattern of expenditure, structure of revenue and tax burden; BOP sector to cover trader gap, major imports, and export crops of Ghana; external debt for country risk analysis; monetary sector to address money supply and demand; labor force and employment to estimate unemployment rate; the relationship between wages, prices and exchange rates; and incremental capital-output ratios and production functions for the agricultural, industrial and services sectors.;The full model consist of 47 identities and 50 behavioral equations. We subject the model to within-sample simulation for 1970-1988, and ex-post and ex-ante forecasts respectively for 1989-1991 and 1992-2000. The simulation results, captured by mean absolute percentage error indicate a good tracking performance of the model. The time paths of the endogenous variables are also fairly well replicated. In a policy recommendation, for annual real GDP growth target of 5.5 percent, investment and labor employment should respectively increase by 11 and 4 percent annually. The investment rate as percent of GDP is expected to average 20 percent with an external financial resource gap of 9 percent of GDP.