Determinants of Portfolio Flows to Ghana: A Dynamic Stochastic General Equilibrium Analysis

The dwindling and erratic official capital inflows to Ghana have necessitated attraction of private capital inflows. Although, efforts have been made in this regard very little is known about the factors that influence portfolio flows and the policy environment that will enhance inflows to Ghana. This study, therefore, investigates the determinants of portfolio flows to Ghana and outlines policy measures that will influence these flows. A Dynamic Stochastic General Equilibrium (DSGE) model is developed as the theoretical framework. The methodology is based on simulation and calibration using Markov Chain Monte Carlo (MCMC) techniques. Ghana-specific simulations are done to derive the policy and transition functions of the DSGE model. From the results, eight categories of determinants of portfolio flows to Ghana are identified. Increasing capital stock accumulation, international interest rate, public investment and its related shock and inflow dynamics will have positive impacts on both portfolio inflows and outflows with net portfolio inflows. However, increases in real domestic money balances, domestic interest rate, public expenditure on foreign good, distortionary tax rate and global inflation rate will generate appreciable negative impacts on both portfolio inflows and outflows. Capital flow dynamics and macroeconomic shocks generate the most significant impacts on portfolio flows. The findings suggest that appropriate fiscal and monetary policy coordination can help attract portfolio flows to Ghana.