Time-varying connectedness between public debt, exchange rate, credit rating, and economic growth in Ghana: TVP-VAR framework

Abstract

This study examines the dynamic connectedness between public debt, exchange rate, credit rating, and economic growth in Ghana using Time-Varying Parameter Vector Autoregression framework. The analysis utilised monthly data spanning from December 2012 to January 2024. The results reveal that connectedness among Ghana's macroeconomic variables is crisis-driven. Exchange rate emerges as the dominant shock transmitter across both domains, while GDP per capita consistently acts as a net recipient. Notably, public debt exhibits contrasting spillover roles, functioning as a net recipient of shock in the time domain but as a net shock transmitter in the frequency domain. Also, credit rating emerged as a moderate shock transmitter in both short and long-term frequencies. The study recommends prioritising short-term volatility management, coordinated fiscal-monetary frameworks, and enhanced debt communication strategies. These findings provide valuable insights for policymakers, central bankers, and investors in designing effective macroeconomic policies for small open economies.