Explaining Government Expenditure and Growth Rate Dynamics in Ghana: A Vector Error Correction Model

This paper examined the Granger-causality relationship between public expenditure and real capita GDP in Ghana, using aggregate data for a sample of 59 years, over the period of 1961–2020. Econometric analyses employed included: The simple Linear Regression Model (SLRM), Augmented Dickey-Fuller (ADF), Granger-causality, and Cointegration Tests (CT). The OLS output reveals that the series has limited ability in predicting each other as indicated by the very low R-square which comes close to zero, the ADF test showed that the series is stationary at the first difference, and The Granger causality test revealed that there is no causality between the series. That is there is no Granger causal linkage between economic growth and government expenditure. In other words, economic growth and government expenditure are independent of the causal mechanism. The null hypothesis of number co integration is not rejected since there is no co-integration at the 5% level of significance. This means that there is no long-run relationship between the series. There is a need for policy in public investment to impact growth rates in the future. Government expenditures need to be institutionalized in order to plan public spending over a period so that government expenditure is projected as a stable share of all anticipated flow of future levels of real income.