International Journal of Innovation and Development

Fiscal Deficit, Corruption and Gross Capital Accumulation in Ghana: a structural VAR Approach

Edmund Ayesu

Kumasi Technical University

Bismark Q. Parker

Kumasi Technical University

John Agyei

Kumasi Technical University

George Asumadu

Kumasi Technical University

Keywords: Fiscal deficit, corruption, private capital accumulation, structural VAR, governance

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Abstract

This study investigates the dynamic interrelationships among fiscal deficits, corruption, and private

capital accumulation in Ghana using structural vector autoregression (SVAR) methodology over the

period 1990-2022. Ghana’s persistent fiscal imbalances and endemic corruption represent critical

impediments to sustainable development, yet their complex interactions with private investment

behavior remain underexplored in existing literature. Employing impulse response functions and

variance decomposition analysis, we examine both short-run dynamics and causal relationships

among these variables while accounting for their endogenous interactions. The empirical results

reveal no long-run cointegrating relationship among the variables, indicating that interactions

are primarily characterized by short-run dynamics completing within three periods. Impulse

response analysis demonstrates bidirectional causality between corruption and fiscal deficits,

with corruption systematically worsening fiscal performance while fiscal stress creates conditions

conducive to corrupt behavior. Notably, corruption innovations generate positive short-run effects

on private capital accumulation, suggesting adaptive rent-seeking strategies by private actors in

weak institutional environments. Variance decomposition reveals that corruption contributes 11%

to fiscal balance variation - the strongest cross-variable relationship in the system - while private

capital formation exhibits the greatest sensitivity to both fiscal and corruption shocks. The findings

support integrated policy approaches addressing governance and fiscal dimensions simultaneously.

Key recommendations include procurement system modernization, strengthened institutional

oversight mechanisms, and coordinated anti-corruption and fiscal consolidation strategies. The

three-period adjustment horizon suggests that well-designed reforms could generate relatively rapid

improvements in macroeconomic and institutional outcomes, providing optimistic prospects for

Ghana’s development under appropriate policy frameworks.

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Author Biographies

Edmund Ayesu, Kumasi Technical University

Centre for Social Science Research, Dept. of Accountancy and Accounting Information Systems,

Bismark Q. Parker, Kumasi Technical University

Centre for Social Science Research,Dept. of Accountancy and Accounting Information Systems

John Agyei, Kumasi Technical University

Centre for Social Science Research,Dept. of Accountancy and Accounting Information Systems,

George Asumadu, Kumasi Technical University

Centre for Social Science Research, Dept. of Accountancy and Accounting Information Systems,