Inflation, public debt and unemployment nexus in Ghana. An ARDL analysis

Saani, Mohammed Ridwan; Abdulai, Abdul-Malik; Salifu, Mubarik Article Inflation, public debt and unemployment nexus in Ghana. An ARDL analysis Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Saani, Mohammed Ridwan; Abdulai, Abdul-Malik; Salifu, Mubarik (2024) : Inflation, public debt and unemployment nexus in Ghana. An ARDL analysis, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-16, https://doi.org/10.1080/23322039.2024.2345296 This Version is available at: https://hdl.handle.net/10419/321479 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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An ARDL analysis Mohammed Ridwan Saani, Abdul-Malik Abdulai & Mubarik Salifu To cite this article: Mohammed Ridwan Saani, Abdul-Malik Abdulai & Mubarik Salifu (2024) Inflation, public debt and unemployment nexus in Ghana. An ARDL analysis, Cogent Economics & Finance, 12:1, 2345296, DOI: 10.1080/23322039.2024.2345296 To link to this article: https://doi.org/10.1080/23322039.2024.2345296 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 03 May 2024. Submit your article to this journal Article views: 2188 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 DEVELOPMENT ECONOMICS | RESEARCH ARTICLE Inflation, public debt and unemployment nexus in Ghana. An ARDL analysis Mohammed Ridwan Saani, Abdul-Malik Abdulai and Mubarik Salifu Department of Economics, University for Development Studies, Tamale, Ghana ABSTRACT In recent years Ghana is challenged with rising debt, surging inflation, and unfavorable unemployment rates. To mitigate their impact on economic prosperity the country requires strategic policy interventions. Using data from 1990 to 2022, this study attempts to analyze the relationship between inflation, public debt, and unemployment in Ghana. The ARDL framework was used to estimate the variables. A long-run relationship between public debt and inflation was established. Notably, inflation correlates negatively with public debt in both short and long -run. Whiles public debt demonstrated a positive correlation with unemployment in both short and long-run, remittances displayed a negative long-run correlation with unemployment. The study suggests that prioritizing domestic debts over foreign debts could be strategic to hedge against inflationary risk. Moreover, we recommend a targeted investment in infrastructure projects and the promotion of agriculture. These initiatives will spur economic growth, engender sustainable development and ultimately create more job opportunities. IMPACT STATEMENT This study examines the relationship between inflation, public debt, and unemployment in Ghana and provides insightful information that is important for academic discourse as well as policy formulation. Using the Autoregressive Distributed Lag (ARDL) framework and data from 1990 to 2022, the study uncovers significant findings. First of all, it proves that there is a long run negative correlation between public debt and inflation, emphasizing the need for prudent debt management measures. Notably, the preference for local debt over borrowing from external sources appears to be a possible hedge against inflationary risks. Secondly, the analysis reveals a positive long run relationship between unemployment and public debt, highlighting the significance of sustainable economic growth measures to counteract this relationship. To achieve this, it is suggested that targeted investments in infrastructure is required in key sectors like agriculture and manufacturing to stimulate economic growth and create employment opportunities. Furthermore, the study emphasizes how crucial it is to improve the trade balance by promoting exports. The effective use of trade can reduce the burden of public debt and promote prosperity. The Ghanaian government is encouraged by these findings to prioritize domestic borrowing and take into account fixed interest rate loans, or loans denominated in local currency in managing the public debt. In the realm of academic literature, the study enriches the discourse regarding the macroeconomic dynamics of developing economies, with a focus on Sub-Saharan Africa. The research provides empirical evidence to support the current debate on debt management, inflation control employment generation. The study significantly lays the foundation for future studies and the development of public policies that promote economic stability and prosperity. ARTICLE HISTORY Received 21 November 2023 Revised 4 April 2024 Accepted 13 April 2024 KEYWORDS Inflation; public debt; unemployment; ARDL analysis REVIEWING EDITOR Goodness Aye, University of Agriculture, Makurdi Benue State, Makurdi, Nigeria SUBJECTS Economics; Finance; Political Economy 1. Introduction The dramatic increase in public debt levels over the past few decades is one important topic that has caught the attention of scholars and policymakers globally, and in particular among Sub-Saharan African (SSA) nations (Akram, 2016; Beqiraj et al., 2018). The overall public debt for SSA has grown, rising from CONTACT Mohammed Ridwan Saani [email protected] Department of Economics, University for Development Studies, Tamale, Ghana. ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2345296 https://doi.org/10.1080/23322039.2024.2345296 an average of 27% of GDP in 2010 to over 59% in 2020 (IMF, 2023). Although the GDP of SSA nations increased by roughly 23% between 2010 and 2017, public debt increased by more than 90% during the same period (Manasseh et al., 2022). The declining performance of a number of macroeconomic measures, including GDP growth rates, exchange rates, unemployment, inflation, and stock market prices among others may be linked to the rising public debt (Fambeu et al., 2022). Inflation, public debt, and unemployment are three of the most important economic indicators that are closely monitored by policymakers, economists, and investors alike. They interact and can have an immense impact on a nation’s stability and general state of the economy. According to Dumitrescu, Enciu, et al. (2022) countries with larger levels of public debt typically have lower rates of inflation and more unemployment, while countries with lower public debt levels tend to have lower unemployment rates and higher inflation. The COVID-19 pandemic’s consequences on the global economy, including those on unemployment, public debt, and inflation, were examined by the IMF. According to the report, the pandemic has led to a notable growth in public debt, but it has caused a decrease in inflation whiles increasing unemployment (Ozili, 2021). Also, Chiu et al. (2023) asserts that while the association between inflation, public debt and unemployment has changed over time, there is still a general inverse relationship between unemployment and inflation. The overall increase in prices of goods and services over time is referred to as inflation. In developing countries, inflation can be particularly high due to factors such as supply-side constraints, monetary instability, and political uncertainty (Gopinath, 2022). In Ghana, inflation has been a persistent challenge over the past few decades, with rates fluctuating between high and low levels. According to the Ghana Statistical Service, the average inflation rate in Ghana between 2010 and 2019 was 15.8 percent (Sarpong-Kumankoma, 2023). This inflation has even increased to 38.1% in September 2023 which is obviously higher than the central bank of Ghana’s target band of 8 ± 2% rate. The high inflation rate has contributed to an increase in the cost of living, resulting to the inability of citizens to pay for basic necessities and leading to a decline in purchasing power (Adil et al., 2021). The decline in purchasing power can culminate to a decline in economic growth and an increase in poverty levels. Whiles this inflation in Ghana is galloping, the country is also recording unsustainable debt to GDP levels contrary to Dumitrescu, Enciu, et al. (2022) finding of high public debt corresponding to lower inflation levels. Whiles inflation rates are on the rise in Sub-Saharan Africa, Ghana, undoubtedly records the highest inflation rate in the ECOWAS sub-region with 45.4%, Sierra-Leone - 37.8%, Nigeria20.1% with Togo, Mali, Cote d’Ivoire and Burkina Faso recording at most 5% inflation rates (Statista, 2023). A government’s outstanding obligation to its creditors, which includes bonds and loans, is referred to as public debt. Future generations may be burdened by high levels of national debt, crowd out private investment, and lead to fiscal imbalances (Ma & Qamruzzaman, 2022). The IMF projects that Ghana’s public debt would reach 98.72% by the end of 2023, having risen dramatically over the past two decades from 28.5 percent of GDP in 2010 to 88.8 percent in 2022.In Ghana the provisional gross public debt at end of the first quarter of 2023 stood at GH¢569.35 billion (US$51.67 billion), representing 71.1 percent of GDP. This comprised external debt of GH¢322.56 billion (US$29.27 billion); representing 40.3percent of GDP, and domestic debt of GH¢246.79 billion (US$22.4 billion); which is 30.8 percent of GDP (Ministry of Finance, 2023). The rising levels of public debt might be attributed to several factors, including high inflation, low tax revenue, and rising public expenditure among other factors. As a result, Ghana has requested a $3 billion bailout package from the International Monetary Fund (IMF) to help address its fiscal challenges and stabilize its economy. The program is expected to help the country reduce inflation, stabilize the local currency, and improve the fiscal position (Salman & Ali, 2022). According to Changole (2022), Ghana is restructuring its debt to complete an IMF rescue worth $3 billion. As Ghana restructures the debt, this is expected to result in losses of $427 million, with lenders registering bond losses as high as 57% during restructuring. The IMF bailout required among others, a completion of a comprehensive debt restructuring covering domestic debt and external debt in addition to fiscal consolidation efforts and other structural reforms (Gray et al., 2023). Although it is unclear if these actions would be effective in reaching the stated objectives, they nonetheless mark a significant step in resolving Ghana’s debt crisis and enhancing the long-term economic prospects of the nation. The number of people who are willing and able to work but are unable to obtain employment is referred to as unemployment .Unemployment can have significant social and economic costs, particularly in developing countries where it can lead to poverty and inequality (Barber, 2023). 2 M. R. SAANI ET AL. The trends reveals that the unemployment rate in Sub-Saharan Africa was as low as 5.45% in 2008, which subsequently fluctuated but rose to 6.798% in 2021. The records show that for the past few years in Sub-Saharan Africa, the unemployment rate peaked in 2021.There is an undesirable fact from the trend that the unemployment rate has been increasing since 2008 which remains unhealthy for the economy of the sub-region (Obasun, 2023). Unemployment in Ghana, has been a challenge, with the average unemployment rate between 2010 and 2019 being 4.3 percent (Mensah, 2023). By the end of 2023, it is anticipated that Ghana’s unemployment rate would be 5.00 percent. Increased poverty, a slowdown in economic growth, and social instability can be caused by high unemployment rate. Additionally, the unemployment rate in Ghana remains high, particularly among youth and women. The unemployment rate of Ghana in 2022 was 3.5%. This increased to 3.60 percent in 2023 from 3.50 percent in 2022 (Ubah et al., 2023). The COVID-19 pandemic has made the situation even worse, as many workers have lost their jobs and seen a decrease in incomes as a result of businesses being compelled to shut down or scale back operations (Shafi et al., 2020, p. 19). In light of this, the goal of this study is to analyze the contemporaneous relationship between inflation, public debt and unemployment in the Ghanaian context. This research is significant and original since it seeks to make an exclusive contribution to the lingering debate. The absence of studies of the correlation between inflation, public debt, and unemployment is one main research gap in the extant literature. While earlier research has looked at few of these indicators (Ahuru et al., 2023; Alnaa & Matey, 2023; Beqiraj et al., 2018; Montati, 2023; Prabheesh et al., 2023; Shuaibu et al., 2021), no attempt has been made to investigate inflation, public debt and unemployment nexus simultaneously. More so, in Ghana few studies have been done which failed to address this lacuna (Aimola & Odhiambo, 2021; Asravor et al., 2023; Evans, 2022). There is also no agreement on which variable leads and which lags in the correlation chain in earlier studies conducted in the literature. This study will also offer policy recommendations geared toward the achievement of sustainable development goal eight (SDG 8), that require us to ensure and promote decent work and economic growth in Ghana. Furthermore, to leverage the benefits of African Continental Free Trade Area (AfCFTA) without increasing public debt, creating more employment opportunities, and reducing inflationary pressures, Ghana would need to ensure prudent macroeconomic management. By analyzing the inflation, public debt and unemployment nexus within Ghana’s specific context, policymakers can develop strategies that mitigate economic volatility, foster job creation, and support sustainable economic growth. Hence, determining intricacies among these variables is critical for Ghana especially at a time when the country is debt distressed and has sought IMF support. 2. Literature review Ghana, a West African nation, is among the region’s economies with the quickest rate of growth and has implemented a number of structural reforms to lower unemployment, inflation, and public debt. Inflation, public debt, and unemployment continue to be major obstacles to the nation’s economic growth and development despite these efforts. Therefore, it becomes imperative for policymakers to comprehend the interplay between, inflation, public debt, and unemployment in order to develop useful economic policies. In affluent nations, the interaction between inflation, public debt, and unemployment has been thoroughly examined, but little research has been done on the subject, notably in Ghana. Previous studies have demonstrated a relationship between unemployment, public debt, and inflation; any alteration in one of these variables can have a significant impact on the other two. For instance, Olaoye (2023) found that inflation and public debt are positively related, suggesting that a rise in public debt can lead to an increase in inflation in Sub Saharan Africa .Similarly, Shuaibu et al. (2021) posit that in Nigeria, a long run correlation exists between public debt and unemployment. Unemployment rises with public debt, although external debt increases unemployment more than domestic debt. However, cointegration study results indicate that there is no correlation between inflation and public debt. Meanwhile studies by Montanti (2023) have proven that inflation and public debt are positively correlated in many countries. In the same vein, Saungweme and Odhiambo (2021) revealed that their research reveals evidence that public debt has a positive and noteworthy influence on Zimbabwe’s inflation dynamics, especially over the long-run. COGENT ECONOMICS & FINANCE 3 Igberi et al. (2016) discovered in their research that there is a long-run positive correlation between public debt and unemployment in Nigeria. Specifically, a 1% increase in unemployment led to a 1.6% increase in unemployment rate all things being equal. However, the long-run correlation between unemployment and inflation was found to be negative. Specifically, a 1% increase in inflation led to a 0.2% decrease in unemployment. An investigation conducted by Singh et al. (2018) evaluated how India’s GDP and unemployment rate were impacted by inflation. This analysis suggests that although insignificant, inflation has a negative correlation with GDP and unemployment. This confirms the study by Ahuru et al. (2023) who concludes that inflation and unemployment are negatively related in many countries. For other studies on public debt. Heimberger (2023) analyzes 816 estimates from 47 primary studies using meta-regression techniques and discovered a lack of proof that a high public debt-to-GDP consistently creates a negative growth effect. Conversely, Abate (2023) discovered that a significant positive shock in debt promotes economic growth, whereas a minor negative shock has the opposite effect. The findings also show that debt has a threshold effect, which implies that; it contributes positively to Ethiopia’s economic growth at levels much below 66.75% of GDP or 36.27% of GNI. Debt incurred above these threshold levels worsens the nation’s economic growth. Obviously, existing research has provided valuable insight into the interaction between inflation, public debt, and unemployment. In Ghana however, some few studies have notably studied the relationship between public debt and unemployment, public debt and inflation, or public debt and unemployment. In light of this, limited attention has been paid to investigate the simultaneous interactions and the intricate dynamics of these variables altogether. For instance, a study by Evans (2022) indicates that GDP growth and external debt are positively correlated in Ghana whiles inflation and unemployment poses a negative effect on GDP growth. The findings further demonstrate that GDP decreased inflation while external debt increased it, and that unemployment had no impact on inflation. According to research by Owusu-Nantwi and Erickson (2016), although there is a bidirectional Granger causality link between public debt and GDP in the short -run, there is a positive and statistically significant long-run association between public debt and economic growth in Ghana. This paper is unique for several reasons. First of all, because Ghana has a unique economic structure any results, if any, from research on the relationship between inflation, public debt and unemployment cannot be specifically applied to Ghana. Secondly, this study attempts to fill the gap in literature by investigating the inflation, public debt and unemployment nexus simultaneously. Thirdly, the government has implemented various policies over the years to address several socio-economic challenges by the establishment of the Monetary Policy Committee to ensure price stability, the issuance of bonds to manage public debt, and the implementation of job creation programs such as the Youth Employment Agency targeted at reducing the unemployment in the country. Therefore, an investigation into the nexus between inflation, public debt, and unemployment in Ghana would provide valuable insight into the effectiveness of these policies and their impact on the economy. 3. Methodology of the study This section presents the theoretical framework on the interplay between the variables under consideration, the various statistical tools and packages used for analysis of this study. Annual data spanning from 1990 to 2023 was obtained from World Development Indicators (WDI) website. First and foremost, a statistically descriptive assessment of the variables was carried out. Secondly, a test for stationarity was conducted by employing the Augmented-Dicky-Fuller (ADF) (Dickey & Fuller, 1979) test for all the series. The ARDL method was then applied after the bound test for cointegration was completed. The lags of all variables were selected using the Akaike Information Criterion (AIC). 3.1. Theoretical framework The theoretical basis for the inflation, public debt, and unemployment nexus in Ghana is based on the idea that inflation, public debt, and unemployment are interrelated and have a causal relationship with each other. According to the classical macroeconomic theory, public debt is predicted to rise as a result of high inflation as the government tries to finance its expenditures (Gu enette et al., 2022). Furthermore, 4 M. R. SAANI ET AL. high inflation can also result in higher unemployment as firms are unable to adjust their prices quickly, leading to lower output and employment (Tesfaselassie & Wolters, 2018). Conversely, excessive public debt can put upward pressure on inflation as the government finances its debt through monetary expansion (Kose et al., 2022). High levels of public debt can also result in lower growth and higher unemployment as resources are diverted away from productive uses to service the debt (Nupehewa et al., 2022). 3.2. Empirical model specification Upon verifying the existence of long-run relationships between all the variables, we plausibly proceeded to estimate the ARDL model. Our first model was to estimate the effect of inflation on public debt which is specified as follows: PD ¼f INF,BD,EXR,GDP,TR ðÞ :::::::::::::::::::::: :: (1) where PD ¼Public Debt ðTotal of domestic and foreign debt as % of GDP) INF ¼Inflation rate, with each variable described in Table A1 at the Appendix. The second model which estimated the impact of public debt on unemployment, is specified as follows: Unemp ¼fPD,INF,GDP,FDI REM,GCF, ðÞ ::::::::::::::::::: (2) Where Unempt ¼Unemployment rat e, PD is public debt PD (Total public debt as a percentage of GDP), with all other the variables defined in Table A1 at the Appendix. Econometrically, Equations (1) and (2) can be presented in Equations (3) and (4) below: PDt¼a0þa1INFtþa2BDtþa3EXRtþa4GDPtþa5TRtþet:::::::::::::::::::::: (3) UNEMPt¼b0þb1PDtþb2INFtþb3GDPtþb4FDItþb5REMtþb6GCFtþlt:::::: (4) The ARDL was employed due to its effectiveness in managing varying degrees of integration and its perceived superiority over the conventional or well-known cointegration models, such as the EngleGranger (Engle & Granger, 1987), Johansen test (Johansen & Juselius, 1990), and Phillip-Ouliaris test, which can simultaneously estimate short and long-run estimates (Is¸ık et al., 2013). The ARDL model has the benefit of simultaneous estimation of short and long-run parameters. When the series are I (0), I (1), or a mix of the two, ARDL can be used. Pesaran (1997) and Ouattara et al. (2004) state that ARDL cannot be applied in cases where any variable is stationary at I (2) since the results will be erroneous. The ARDL models estimated are specified as follows: DPDt¼b0þb1PDt−1þb2INFt−1þb3BDt−1þb4EXRt−1þb5GDPt−1þb6TRt−1þX n i¼1 c1DPDt−i þX q i¼1 c2DINFt−iþX q i¼1 c3DBDt−iþX q i¼1 c4DEXRt−iþX q i¼1 c5DGDPt−iþX q i¼1 c6DTRt−iþet::::::::::::: (5) In Equation (5),Drepresents the difference operator, b0denotes the intercept term b1to b6estimates the long-run parameters whiles c1to c6are the short run coefficients. n reports the lags for public debt and q reports the lags for the regressors. To determine the short run coefficients, the error correction model (ECM) is then established. The ECM function can be stated as follows: DPDt¼X n j¼1 a1PDt−jþX n j¼1 a2INFt−jþX n j¼1 a3BDt−jþX n j¼1 a4EXRt−jþX n j¼1 a5GDPt−jþX n j¼1 a6TRt−jþhECMt−jþlt (6) where his the ECM coefficient, which is essentially expected to be strongly negative and controls the rate of adjustment to long-run equilibrium. The error correction term known as ECM takes into account the model’s long-run representation (Darko, 2016). COGENT ECONOMICS & FINANCE 5 DUNEMPt¼b0þb1UNEMPt−1þb2PDt−1þb3INFt−1þb4GDPt−1þb5FDIt−1þb6REMt−1þb7GCFt−1 þX n i¼1 h1DUNEMPt−iþX n i¼1 h2DPDt−iþX n i¼1 h3DINFt−iþX n i¼1 h4DGDPt−iþX n i¼1 h5DFDt−i þX n i¼1 h6DREMt−iþX n i¼1 h7DGCFt−iþet(7) Similarly, in Equation (7),Drefers to the difference operator, b0represents the intercept term, b1to b8determines the long run parameters whiles h1to h6also denotes the short run coefficients. Thus, the ECM function to determine the short run coefficients can be expressed as below: DUNEMPt¼X n j¼1 a1UNEMPt−jþX n j¼1 a2PDt−jþX n j¼1 a3INFt−jþX n j¼1 a4GDPt−jþX n j¼1 a5FDIt−jþX n j¼1 a6REMt−j þX n j¼1 a7GCFt−jþcECMt−1þlt:(8) where cis the coefficient of the error correction term, which ought to be negative and significant. The ECM provides a metric for the speed of adjustment to the long-run. Following the estimation of the long and short-run coefficients, the model is subjected to pertinent diagnostic and stability tests to make sure it is stable, devoid of serial correlation, and heteroskedasticity. 3.3. Data analysis and discussion of findings Annual time-series data from 1990 to 2022 were used in the analysis. The variables were subjected to a descriptive analysis in order to demonstrate their distribution and trends. Public debt had the secondhighest mean value in Table 1 below, at 58.97, behind trade with 72.897. This points to Ghana’s extremely high and erratic levels of national debt over the period of the study. Such amounts of public debt may result from borrowing to fund fiscal shortfalls or the financing of infrastructure projects. The nation’s average budget deficit was 5.908%, indicating a fiscal imbalance and a potential inclination to borrow money to cover the shortfall. The exchange rate turned out to be the least volatile variable, whereas public debt was the most volatile. In terms of standard deviation, which measures how dispersed the observed variables are from their mean. The cost-of-living index, or inflation, recorded a mean of 18.762% for the period, with significant price fluctuations between 6.698% and 59.317%. A number of variables, including excessive growth of money supply, supply chain disruptions, or external shocks, may be responsible for the high inflation and rising cost of living. Ghana’s unemployment rate fluctuated between 2.170% to 10.460%, with a mean of 5.53%, reflecting a relatively stable rate. The country’s average GDP was 5.247%, signifying good economic growth and promising future prospects for the nation. Furthermore, the average amount of remittances received by Ghana (2.342) was less than FDI (3.895), which was also less than gross capital formation (20.179). This suggests that while gross capital formation has contributed moderately to Ghana’s economic growth throughout this time, FDI and remittances have contributed very little. Finally, with a mean of 1.917 and a standard deviation of 1.796, Table 1. Descriptive statistics of variables. Variable Observation Mean Maximum Minimum Std. dev PD 33 58.970 111.945 26.216 19.743 INF 33 18.762 59.317 6.698 11.794 UNEMPT 33 5.536 10.460 2.170 2.142 TR 33 72.897 116.048 38.517 19.466 REM 33 2.342 10.085 0.094 2.721 GDP 33 5.247 14.047 0.514 2.483 GCF 33 20.179 29.002 11.764 4.854 FDI 33 3.895 9.466 0.251 2.692 EXR 33 1.917 5.712 0.680 1.796 BD 33 −5.908 −1.590 −17.440 3.272 Source: Author’s construct, 2023. 6 M. R. SAANI ET AL. the exchange rate was the most stable variable, while trade was found to be the most volatile, with a mean of 72.897 and variance between 38.517 and 116.048. The trend of these variables was also observed and assessed over the period, which is depicted in Figure 1below. Before 1992 we observed a decline in inflation. Subsequently, there was a dip in inflation in 1992. Both inflation and public debt were positive, increased steadily from 1992 to 1996 and turned negative with a decline until the year 1999 when there was a dip in both economic variables. These two variables became positive, and made a steady increase until 2001 when they peaked and thereafter declined until 2002. After 2002, inflation turned stochastic, and modestly positive until 2021 to 2022 when it became explosively positive. This rise in inflation could be attributed to high government spending in election 2020, and the obvious disruption of supply chains with the associated shortages and price hikes for imports resulting from the COVID-19 pandemic. However, public debt tends to decrease sharply from 2000 till 2006, increased steadily thereafter until 2016 and began to decline moderately till 2021. This sharp decline in the public debt from 2000 could be explained perhaps by the change in government and the declaration of Ghana as a highly indebted country (HIPIC), granting Ghana the opportunity to have most of her debt canceled. Unemployment over the period remained positive and only increased modestly. 3.4. Stationarity test To avoid producing spurious regression results which could be used for analysis and consequently for making economic decisions, it is desirable to conduct stationarity test of the series. Therefore, the unit root test was conducted. 0 20 40 60 80 100 120 19901992199419961998200020022004200620082010201220142016201820202022 Rate Year PD INF Unempt Figure 1. Trend graphs of variables. Source: Authors’construct, 2023. Table 2. Results of Unit Root Test (ADF). Level Form First Difference ADF ADF Variable Intercept Prob Intercept Prob PD −2.1873 0.2145 −4.5964 0.0009 REM −1.6708 0.4359 −6.7007 0.0000 INF −3.2405 0.0267 −6.1696 0.0000 FDI −1.8962 0.3298 −5.1294 0.0002 EXR −2.2722 0.4326 −4.7583 0.0033 GCF −2.6787 0.0887 −5.4363 0.0001 GDP −3.7145 0.0086 −7.8050 0.0000 UNEMPT −1.2552 0.6368 −4.6641 0.0008 TR −2.4225 0.1438 −6.7538 0.0000 BD −2.1856 0.2151 −3.8477 0.0070 Significance at 1% level. Source: Author’s construct, 2023. 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Variable Definition Measurement PD Public debt Total domestic and foreign debt as a percentage of GDP INF Inflation rate Inflation as measured by the consumer price index UNEMPT Unemployment rate Labour force as a percentage of total working age population TR Trade (Openness of the economy) Imports plus exports (% of GDP) REM Foreign Remittances received Total remittances received (% of GDP) GDP Gross Domestic Product Annual percentage growth rate of GDP at market prices GCF Gross Capital Formation Gross Capital Formation as a percentage of GDP FDI Foreign Direct Investment Foreign Direct Investment as a percentage of GDP EXR Exchange rate Exchange rate in US dollars as percentage of GDP BD Budget deficit Budget deficit as a percentage of GDP Source: Author’s construct, 2023. 14 M. R. SAANI ET AL. -15 -10 -5 0 5 10 15 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 CUSUM 5% Significance -0.4 0.0 0.4 0.8 1.2 1.6 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 CUSUM of Squares 5% Significance Figure A1. Stability test for Model 1. COGENT ECONOMICS & FINANCE 15 stability -15 -10 -5 0 5 10 15 02 04 06 08 10 12 14 16 18 20 22 CUSUM 5% Significance -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 02 04 06 08 10 12 14 16 18 20 22 CUSUM of Squares 5% Significance Figure B1. Stability test for Model 2. 16 M. R. SAANI ET AL.