Studying The Nexus Of Monetary And Fiscal Policies On Economic Growth And Environmental Quality In Ghana

Economic growth in Ghana has not experienced a continuous increment for the past decades.This can be attributed to political changes(which come with different governmental policies and implementations)and constant changes in the Ghanaian economy’s fundamental policies.With a growth rate ranging from 6.3 per cent to 7.1 per cent in 2019,Ghana is among the world’s top ten fastest-growing economies.Ghana’s economy grew by 6.7 per cent in the first quarter of 2019,compared to 5.4 per cent in the same period last year.Many structural reforms and programs have been launched to combat macroeconomic uncertainty,with monetary and fiscal policy at the forefront.It is well acknowledged that monetary and fiscal policies are integral part of economic growth and development.In the quest to attain an economic growth rate,the environment should not be neglected since human activities have greater proneness to emitting gases into the atmosphere,resulting in a rise in air temperature and sea levels.The environment has been an issue of concern for both local and international bodies across the globe for the past two to three decades.The ongoing threat posed by carbon emissions has renewed global activism to address its adverse consequences with utmost vigour.Anthropogenic gases are the most significant pollutants in emerging economies’ carbon footprint.Ghana has the potential to contribute to global carbon dioxide emissions as its growth rate improves through industrialization.Most empirical studies conducted in this area firmly outline how economic growth affects environmental quality.Several studies have been carried out on the impact of fiscal and monetary policy tools on economic growth in developed and developing countries with the focus on the fiscal and monetary components on growth.However,few studies have attempted to link these policies implementations of government to the environment.Studies conducted in Ghana have looked at environmental pollution from the perspective of natural resource extraction,economic growth,trade openness,energy consumption,urbanization and agriculture.The study,therefore,looks at the nexus of monetary policy and fiscal policy tools on economic growth and environmental quality in the Ghanaian context.The individual component of fiscal policy tools(government expenditure,government tax revenue),monetary policy tools(interest rate,monetary policy rate,money supply,inflation,and exchange rate),labor,capital,economic growth,industrialization,and electricity consumption are used respectively.The study seeks to achieve the following research objectives.First,to investigate the effect of monetary policy on economic growth in Ghana.Second,to test whether government fiscal policy asymmetrically affects growth in the Ghanaian economy.Lastly,to examine the combined impact of monetary and fiscal policies on the carbon emissions of Ghana,focusing on industrialization as a road map to growth.To accomplish these objectives,a time series data set was sourced from the Bank of Ghana(Bo G)and World Development Indicator(WDI)from1988to 2019.In addition,a time series models of Johansen-Juselius Co-integration(which restricts first order cointegration);autoregressive distributive lag(ARDL)(which does not impose restriction of first-order cointegration and free of endogeneity issues as well as autocorrelation)and non-linear autoregressive distributive lag(NARDL)which account for the asymmetric partial sums of variable(s)into positives and negatives when decomposed were employed.These models are more robust and give better statistical inferences.Variables used as explanatory variables include;government tax revenue(GR)measured as a percentage of GDP;government expenditure(GE)measured as general government final expenditure as a percentage of GDP.Money supply(MS)measured as Broad money growth(annual %);interest rate(INT)as 91-day Treasury Bill interest rate equivalent(annual %);policy rate(PR)as monetary policy rate(annual %);inflation(INFL)as consumer price index(annual%)and exchange rate(EXC)as official exchange rate(LCU per US$,period average).Likewise,in ensuring that the study is devoid of any omitted variable and biasedness,the study added labor(LAB)which was measured as total Labour Force;capital(CAP)as gross fixed capital formation as a percentage of GDP;industrialization(INDS)as Industry(including construction)value added(% GDP)and electricity consumption(ELE)as measures of electricity production from hydroelectric sources(% of total).Empirical results of the first objective using Johansen-Juselius Co-integration revealed a long-run positive and significant impact of MS and EXC on GDP.Suggesting an increase in MS and EXC leading to a rise of 44.62% and 37.56% in GDP in the long-run.Again,INT,PR,and INFL showed a significant but inverse influence on growth rate.Inferring that decreasing INT,PR,and INFL by a percentage boost GDP by 70.10%,99.76%,and 86.62% in the long-run.Comparatively,the impact exerted by INT,PR,and INFL on GDP is stronger than MS and EXC on GDP in both long-run and short-run.Furthermore,from the results obtained,a long-run bidirectional causal relationship existed between MS and GDP.Again,there was a unidirectional causal relationship from INT,INFL,and EXC to GDP,with the causality stemming from INT,INFL,and EXC to GDP.Findings from the second objective using ARDL and NARDL approach established that GR,GE and LAB showed a strong positive and significant impact on GDP whilst CAP had a significant but inverse effect on GDP in the long-run for ARDL.NARDL model shows that positive shocks of GR exerted much impact on GDP compared to its negative shocks in both long and short run.Estimations form the long-run suggested that positive shocks of GE increase GDP whereas the negative shocks decrease GDP.The Granger test,from the NARDL model,showed a Uni-directional causation moving from the positive and negative shocks of GR to GDP and negative shocks of GE to GDP.Also,a bidirectional were recorded from LAB and the positive shocks of GE to GDP.In the ARDL model bi-directional causality is recorded from GE,GR,and LAB and GDP.Hence,the research then concludes with a strong asymmetric relationship between government fiscal policy and economic growth.Lastly,determining the third objective of the study ARDL model was employed.The findings established that GR and GE impacted CE with an increment of 55.99% and 50.13% in the long-run whereas in the short-run GR significantly affected CE positively and GE insignificantly affected emission in Ghana.MS exerted a positive and significant impact on emissions in the long and short-run.Inferring that a percent increment in money in circulation leading to a rise of 52.22%in CE.However,inflation inversely affected emission but was statistically insignificant in the longrun.GDP,on the other hand,significantly impacted CE positively in the short and long run,with61.51% and 70.61%,respectively.Again,Industrialization(INDS)positively and significantly impacted CE by 95.91% in the long-run.Electricity consumption(ELE)exhibited a negative and significant influence on CE in the long-run and short-run,reducing 51.73% and 52.62% of CE.Additionally,the study discovered an inverted U-shape relationship between fiscal policy tools(GR and GE)and CE,but there was no evidence of the EKC hypothesis in Ghana.Granger causality suggests a bidirectional causal linkage between GDP,INDS and CE,MS,and INDS.Finally,unidirectional between GR,GE,MS,ELE,and CE,with the causality running from GR,GE,ELE,MS to CE.Recommendations made by the study suggest that interest rate,monetary policy rate,and inflation significantly exerted negative pressure on growth rate and development.Therefore,monetary policy authorities and Bo G should develop structural reforms and policies that help create a favourable climate to keep these policy tools at a desirable rate to support domestic and foreign investment.On the other hand,Go G should devise measures to intensify financial development.Moreover,it is advised that the composition of government expenditure be analysed to boost growth due to its direct effect on growth and to avoid crowding out,resulting from borrowings used to sponsor unproductive public consumption.Also,the tax base in Ghana can be broadened by considering policies that would raise the level of business activities and individuals who are not captured.Another suggestion raised by this study is that in the long-run labour force has a strong and positive effect on growth;therefore,the speed of Ghana’s economy can be improved by policies that guarantee quality,skilled and sustainable labour force.Furthermore,the study recommends government of Ghana to come up with constructive policies to help mitigate emissions since its implementations on monetary and fiscal policies directly impact emissions.In view of the newest policy to embark on one district one factory,it is recommended that the government liaises with other regulatory bodies across the nation to constantly monitor carbon dioxide emission by both old and new factories.Additionally,it is imperative that stringent environmental regulations are set up to control industrial waste considering the fact that the country lacks the technology to manage such waste.Lastly,Ghana is a developing economy and entirely new to industrialization;hence,the recent COVID-19 has opened the country to more unique policies and technology to be industrially self-reliant.Therefore,it is recommended that the government introduces an emission tax to help reduce industrial emissions from the outset.The study offers significant understanding of monetary and fiscal decision making,benefitcost of economic growth,and carbon emissions,which has compelling implications for policy makers,scholars,and practitioners.The findings of this research have the propensity to advance the theoretical framework and basis of monetary and fiscal concept and their impact on economic growth and development on current literature.The use of various variables to efficiently advocate and evaluate the nexus of monetary and fiscal policies on growth rate and carbon emissions have yielded startling results.The use of both analytical and methodological approaches has broadened the understanding of how monetary and fiscal policies influence economic growth and carbon emission.