A DUAL EVIDENCE ON THE OPTIMAL USE OF SEIGNIORAGE IN GHANA

Abstract

There is by now enough evidence that Ghana relies to some extent on the use of seigniorage to finance its budget. This study however, further the empirical scholarship on the optimal path the economy follows in its use of seigniorage within two analytical models. We have provided evidence to reject Barro's (1979) tax-smoothing hypothesis. In the case of Ghana, there is no positive long run relationship between the tax rate and the rate of inflation. Additionally, following Andrabi (1997) game-theoretic model, we provide further evidence that seigniorage is not used optimally in the public finance scheme in the Ghanaian economy because in contrast to the prediction of the model, there is no significant positive relationship between seigniorage and transitory output. The implication of our finding is that the economy of Ghana appears to find itself on the wrong side of seigniorage maximizing revenue Laffer curve.