Modelling the relationship between oil prices and economic activity : empirical evidence from Ghana

This thesis investigates the macroeconomic effects of domestic oil prices and international crude oil prices in Ghana. We investigate the ability of oil prices to influence economic growth in Ghana using annual data from 1971 to 2014. We also examine the possibility of shock spillover and volatility spillover effects from domestic and crude oil prices to the Ghana currency exchange rates and the Ghana stock market index using monthly data from January 1991 to December 2015. To conduct these investigations, this study employed various econometric techniques including; unit root testing, cointegration testing, vector autoregressive model (VAR), structural VAR (SVAR), vector error correction model (VECM), scenario-based dynamic forecasting, the autoregressive distributive lag (ARDL) specification, and the generalized autoregressive conditional heteroscedasticity (GARCH) BEKK model. Overall, this study seeks to address two central issues; i) whether domestic and world oil prices have the same effect on economic activities and financial variables in Ghana, and ii) whether the crude oil price and the macro economy relationship in Ghana is related to the treatment of crude oil prices as exogenous or endogenous. It is important to recognize the exogeneity of crude oil prices in the context of Ghana given the relatively small size of the Ghanaian economy. The findings suggest that the international crude oil price movements have an insignificant effect on output growth in Ghana both in the short run and in the long, regardless of whether the crude oil price is treated as exogenous or endogenous. However, domestic oil prices have a significant effect on the output growth rate only in the long run. The findings also indicate that world crude oil prices have significant spillover effects on the exchange rate, and this result is unaffected by the treatment of world crude oil prices as exogenous or endogenous. However, the relationship between crude oil prices and the Ghana stock market depends on whether the crude oil price is exogenous or endogenous. In addition, domestic oil prices have significant spillover effects on the exchange rate and the stock market. Domestic oil prices are also found to have more influence on the stock market than crude oil prices do. The results of this study have some implications for the government and investors; (i) Increases in crude oil prices do not put a binding constraint on the monetary authorities to loosen monetary policy to offset its effect on output. If inflation is a priority, policy makers could focus on inflation stabilization by tightening monetary policy during oil price rises. (ii) The government?s tax policies on petroleum products should not only be focused on revenue generation, but also on ensuring that such policies do not lead to exorbitant domestic oil prices since higher taxes on petroleum products will increase domestic oil prices which can be detrimental to the economy in the long term. (iii) The government should formulate transport-related policies such as promoting mass transportation or encouraging the use of electrically powered vehicles. The government can also encourage the use of renewable energy such as solar to help reduce the country?s dependence on oil (iv) Internationally diversified portfolio investors in Ghana should use hedging strategies such as currency forwards, futures, and options to protect their investments from exchange rate risk emanating from oil price shocks.