Business cycles in a cocoa and gold economy: Commodity price shocks do not always matter

This paper seeks to characterize the response of Ghana’s business cycle to cocoa and gold commodity price shocks using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. We then provide some plausible explanations underlying the estimated effect of these price shocks on Ghana’s business cycle. In the yearly model, a significant positive effect of a cocoa price shock on Ghana’s business cycle is observed using data from 1960 to 2018. However, no significant effect of a gold price shock on Ghana’s business cycle was found. In the quarterly model, we found no significant effect of both cocoa and gold price shocks on Ghana’s quarterly business cycle under Ghana’s inflation-targeting monetary policy regime. The study concludes that the expected strong influence of cocoa and gold commodity price shocks on Ghana’s yearly and quarterly business cycles is not consistently supported by empirical data for all periods and time frequencies. We then suggest plausible explanations for the unexpectedly weak estimated effects of the two commodity price shocks on Ghana’s business cycle, particularly after the mid-1980s, including the role of a foreign-dominated gold sector, the influence of cocoa forward contracts, and the impact of cocoa smuggling. These findings call into question the incorporation of cocoa and gold commodity sectors into a business cycle model for Ghana’s economy for all business cycle episodes and time frequencies, contrary to conventional wisdom. Gold and cocoa windfalls/shortfalls in the short run are almost non-existent, which has important implications for Ghanaian policymakers and model builders.