The impact of macroeconomic policy and supply shocks on sectoral output and the implications for policy

Abstract

PurposeLittle is known about the quantitative impact of macro policies on disaggregated variables. This study investigates the effects of macroeconomic policies and cost/supply shocks on sectoral output growth.Design/methodology/approachWe analyzed empirical evidence from Ghana using a Structural Vector Autoregression approach.FindingsThe results show that the transmission of various macro policies and supply/cost shocks is conditional on sectoral idiosyncrasies. Fiscal programs contribute the most to agricultural output growth and the least to industrial production. The downturn from rising costs and supply disruptions is more severe and lasting in the agriculture sector than in the service sector. The evidence shows that fiscal consolidation centered on government consumption cuts would not drag growth over the medium-term.Practical implicationsOur results show that the structural characteristics of a country may play an important role in understanding the output effects of macro policy changes. The empirical evidence shows that targeted policies are needed to complement countercyclical macroeconomic policies to facilitate broad-based economic recovery.Originality/valueResearch on the impact of macro policy shocks on the real economy has usually focused on the behavior of highly aggregated variables. In this research, we focus on disaggregated, sector-level variables to unveil the idiosyncrasies in the performance of disaggregated variables that are usually concealed when studying the behavior of aggregate variables. This study also contributes a different angle to the debate on supply shocks by examining how cost shocks are propagated through the various sectors of the economy.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-11-2023-0876