Observed growth rates since 2010 are largely cyclical and not justified by the policies captured by the model. This can be seen from the fact that the model generally predicts growth quite well but not for the period 2010-2015 (see rightmost panel in Figure 5). During this period, especially excessive government consumption held back structural growth drivers (see Table 3). It is important in this context to distinguish between actual output (a combination of potential output and cyclical factors) and long-run potential output. This is illustrated in Figure 6 which uses the standard Hodrick-Prescott filter to decompose actual GDP into an estimate of the trend of potential output (blue line) and cyclical fluctuations. Our econometric model, particularly the use of 5-year averages and of the System-GMM estimator, focuses on the determinants of long-run potential output. That is also why government consumption enters the model negatively: having already controlled for the growth-enhancing factors that public spending achieves (such as education and infrastructure), large public consumption puts a burden on output as the taxes needed to finance it act as a distortion to the economy. Figure 6 adds another important insight: actual output in the period after 2010 was way above potential. This is in line with fiscal spending only temporarily improving output and explains why our model ‘underpredicts’ growth so severely: because potential output (which the model is supposed to capture) by far did not grow as much as observed GDP. Especially the right panel of Figure 6 highlights that the cyclical deviation from the trend of potential output was enormously large during the most recent growth episode.

The initial boom during this period, peaking in 11.3 percent growth in 2011, mainly reflected increased prices of Ghana’s main commodity exports, notably gold and cocoa, and the initiation of commercial oil production in 2011, together with a loose (and possibly election-driven) fiscal policy stance. The bust thereafter saw growth declining four consecutive years, down to 1.6 percent in 2015, and reflected a combination of declining commodity prices, energy rationing (partly due to reduced hydropower output in face of drought conditions), and a large fiscal crisis in 2013. Avoiding such boom-and-bust cycles is an important goal of stabilization policies, since such volatilities can themselves have negative impacts on long-term output.<sup>13</sup>

**Figure 6: Cyclical and trend GDP p.c.**

<!-- Start of picture text --> A. Real GDP p.c. against its trend potential B. Cyclical component of real p.a. GDP<br>1960 1970 1980 1990 2000 2010<br>year<br> HP 'trend' ln GDP p.c. ln GDP p.c. 1960 1970 1980 1990 2000 2010<br>year<br>.2<br>8.2<br>8 .1<br>7.8 0<br>7.6<br>-.1<br>7.4 lngdppc cyclical component from hp filter<br>-.2<br><!-- End of picture text --> Source: own calculation based on annual data from PWT9.0. The smooth blue line in the left panel is an estimate of potential output (measured as log GDP p.c.) with cyclical fluctuations (red line) around it. The latter component is separately displayed in the right panel. A positive value here indicates that output is ‘above potential’.

13 There is a vast literature addressing this relationship, staring with the seminal paper by Ramey and Ramey (1995).

14