This study employs the DSGE model within the RBC framework to investigate the macroeconomic dynamics of public debt shocks in Ghana. The model captures fiscal implications on performance indicators amidst the post-COVID-19 macroeconomic outlook. The model unveils a significant initial contraction in output from the debt shock, which reflects the fiscal pressures on productive investments. Household consumption instantaneously spikes; however, it plummets in anticipation of future tax policy adjustments. While government’s fiscal consolidation response results in expenditure cuts to achieve macroeconomic stability. Investment and capital stock exhibit a trade-off with consumption due to stricter fiscal reactions post-shock. Real interest rate plunges due to reduced borrowing, while labor supply decreases at first due to uncertainties in income and lessor demand as output falls. Government expenditures shrink, demonstrating the efficacy of fiscal policies in managing debt. Meanwhile, sensitivity analyses affirm the robustness of the RBC, depicting that debt persistence and fiscal reaction parameters significantly shape macroeconomic outcomes. Further examination justifies the closed economy, citing theoretical and empirical evidence that fiscal responses demonstrate similar behavior in both closed and open economies under certain conditions. This research contributes to the literature, indicating that fiscal policies could be deployed to stabilize vulnerable economies in crisis.
Samuel Otokunor ARMAH (Mon,) studied this question.