Oil Windfalls in Ghana: A DSGE Approach

IMF Working Papers, May 1, 2010

Source details

Authors: Jihad Dagher, Jan Gottschalk, Rafael A Portillo
Date: May 1, 2010
Core approach: Calibrated multi-sector DSGE model to analyze likely impact of oil windfalls on the Ghanaian economy under alternative fiscal and monetary policy responses.
Analytical distinction: Short-run impacts (demand-related pressures) versus medium-run impacts (competitiveness and growth).

The impact on inflation and the real exchange rate could be moderate, especially if fiscal authorities smooth oil-related spending or increase public spending’s import content.
A policy mix that combines a fiscal expansion with simultaneous accumulation of foreign currency proceeds from oil as international reserves—to offset the real appreciation—would:
- Raise demand pressures.
- Crowd out the private sector.

The negative impact on competitiveness (”Dutch Disease” effects) could be small, provided public spending increases the stock of productive public capital.
The interaction of policy responses matters for the macroeconomic impact of oil proceeds.

Smooth oil-related public spending to moderate inflationary and real exchange rate pressures.
Consider increasing the import content of public spending to reduce domestic demand pressures on tradable sectors.
Be cautious with a policy mix that simultaneously expands fiscal spending and accumulates international reserves, because this can amplify demand pressures and crowd out private investment.
Prioritize public spending that increases productive public capital to mitigate medium-term competitiveness losses.