The asymmetric effect of crude oil price shocks on fiscal policy

The paper responds to the need for empirical knowledge about the asymmetric effects of crude oil prices on fiscal policy in Ghana. The study used time series data spanning from 1980-2018 and adapted the Nonlinear ARDL model from Shin et al., (2014). An index was created for fiscal policy variable (Taxation and government expenditure). The study established that oil price shocks affect fiscal policy through two channels (i) government expenditure (ii) tax revenue. The result revealed from a double-edged view that oil price hasa two-way impact (positive and negative). An increase in oil price; (a) increases government expenditure hence limit fiscal pace (b) and at the same time increases tax revenue through oil tax revenue. The study establishes a strong evidence that the impact of oil price volatility on fiscal policy in Ghana differs substantially in the short run and long run. We establish persuasive evidence of long run asymmetry in the linkage between crude oil price and fiscal policy confirming the relevance of asymmetric nonlinear in this context. However, the short run relationship between oil price and fiscal policy is symmetrical. In particular, the asymmetric relationship suggests that the response of fiscal policy to negative oil price shock is greater in magnitude as compared to a positive shock. We found that the asymmetric impact of oil price shock on government expenditure in Ghana is a long-run phenomenon. Our empirical findings would inform the government on how to manage political pressure in the midst of the volatile energy market.