The macroeconomic effects of productivity shocks: Predictions of conventional business cycle models are not always incompatible with SSA economies

Abstract

Despite the increasing application of DSGE and RBC models to Sub-Saharan African (SSA) economies, questions persist about their alignment with empirical evidence for these economies. This study challenges claims of substantial incongruity with respect to the propagation of productivity shocks by demonstrating a close correspondence between empirical evidence for Ghana’s economy and predictions of the classical real business cycle model. Following a positive productivity shock, we observe a positive comovement among aggregate demand variables (i.e., consumption, investment, government spending, exports, and imports), aggregate supply variables (capital and labor), and money supply while the inflation rate and interest rate decline. Among these, we find the responses of output, consumption, government spending, and inflation rate to be statistically significant. These results contradict assertions of discordance between conventional business cycle models and SSA structural characteristics, at least for Ghana’s economy. The study is motivated by limited empirical evidence on how productivity shocks propagate through SSA economies, and for Ghana, there is no such study. On a secondary goal and by virtue of using a time-varying parameter VAR model, our results also suggest that Ghana’s long business cycle moderation from the mid-1980s to about 2010 was primarily due to a reduction in the volatility of shocks hitting the economy rather than changes in the structural relationship between macroeconomic variables.