Elections and Inflation: Evidence from Ghana

Abstract

The misuse of fiscal and monetary policies to incentivize electorates to re-elect an incumbent is one that has been extensively researched. This has come to be referred to as the political business cycle. This cycle refers to the opportunistic manipulation of key policy variables by the incumbent to stimulate the economy prior to a presidential election. The effects of these expansionary activities of the incumbent are suspected to impact various macroeconomic variables. This study sought to investigate the impact of elections on Ghana‘s inflation by verifying the existence of a political business cycle. Data gathering was restricted to the fourth republic (1990 to 2016); the period of consistent and uninterrupted democratic rule in Ghana. The ARDL model was used to empirically investigate the existence of a political business cycle in Ghana. Two scenarios were estimated using the ARDL model: the first involving a pooled election dummy for the election years under consideration and the second, disaggregated election dummies for the individual years that elections were held. Conflicting results were obtained. For the pooled election dummy, elections were found to be statistically significant in affecting inflation. On the other hand, for the disaggregated election dummies, the individual election years were found not to be statistically significant in affecting inflation. As such, the study finds that the effect of elections on Ghana‘s inflation is inconclusive. The study‘s findings, thus, indicate that inflationary surges in Ghana may not be conclusively attributable to the effect of the political business cycle. Notwithstanding, it is recommended that fiscal discipline and increased accountability be enforced to control government spending and fiscal deficits in election years.