n African Finance Journal - Modelling the determinants of private investment in Ghana

Volume 2, Issue 2
  • ISSN : 1605-9786



The main objective of this paper is to analyse the determinants of long-run aggregate private sector investment behaviour in Ghana. We model the long- and short-run investment behaviour of the firm in the private sector in Ghana and solve these models by a dynamic optimisation approach to establish the optimal long-and short-run determinants of private investment functions. Time series data is then used to test empirically the long-run investment function using co-integration analysis. Our empirical results show that there is some significant relationship between private investment and the factors such as mark-up, the general price level, aggregate demand and the cost of investment in the long run. This paper highlights the fact that stabilisation policies, aimed at controlling aggregate demand, such as higher domestic interest rates, and exchange rate devaluation, would hurt private investment in Ghana if they increase the cost of investment for private sector firms. Secondly, financing large fiscal deficits through domestic borrowing, in general, reduces the amount of resources available to the private sector and also raises the cost of borrowing for local firms and thereby hurts private investment.

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