The Transmission Shock Effect of Fiscal Deficit Financing and Inflation Dynamics in Ghana.

This article examines the transmission shock effects of fiscal deficit financing on inflation dynamics in Ghana from 1980 to 2018, employing the fiscal theory of the price level and a structural vector autoregression (SVAR) methodology. The study finds that monetary expansion and monetization of fiscal deficits significantly contribute to inflation variability—accounting for approximately 26% and 24%, respectively—while external financing contributes about 6%, with domestic financing posing a notable inflation risk. Empirical results indicate that inflation in Ghana is largely influenced by monetary growth and import capacity, with fiscal deficits impacting inflation primarily through their monetization rather than direct effects. The article recommends policy measures including enacting a zero Central Bank financing clause, strengthening the Bank of Ghana’s monetary independence, and enforcing the Fiscal Responsibility Act to ensure debt sustainability and price stability.