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The economy of Ghana is highly vulnerable to fluctuations in the international price of crude oil. This is due to the fact that oil as a commodity plays a central role in the economic activities of the nation. The objective of this paper is to investigate the dynamic relationship between oil price shocks and macroeconomic variables in the Ghanaian economy. This is achieved through the use of Vector Autoregressive (VAR) and Vector Error Correction (VECM) models. The variables considered in the study include: real oil price, real government expenditure, real industry value added, real imports, inflation and the real effective exchange rate. The study points out the asymmetric effects of oil price shocks; for instance, positive as well as negative oil price shocks on the macroeconomic variables used. The empirical findings of this study suggest that both linear and nonlinear oil price shocks have adverse impact on macroeconomic variables in Ghana. Positive oil price shocks are stronger than negative shocks with respect to government expenditure, inflation and the real effective exchange rate. Industry value added and imports have stronger responses to negative oil price shocks. Positive oil price shocks account for about 30% of fluctuations in government expenditure, 5% of imports, 6% of industry value added, 17% of inflation and 2% of the real effective exchange rate in the long run. Negative oil price shocks account for about 8% of fluctuations in government spending, 20% of imports, 8% of inflation and 2% of the real effective exchange rate in the long run. The data was obtained from the United States Energy Information Administration and the World Bank’s World Development Indicators.

Effects of Oil Price Shocks on the Ghanaian Economy