Inflation Dynamics In A Small Developing Economy: An Empirical Analysis for Ghana

Mustapha Ibn Boamah ()
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Mustapha Ibn Boamah: University of New Brunswick, Canada

Journal of Developing Areas, 2019, vol. 53, issue 3, 229-237

Abstract: Monetary policy over the data period is aimed at sustaining the growth in the money supply achieved through a tight monetary policy stance, thereby ensuring price and exchange rate stability. This paper aims to empirically examine the share of exchange rate pass-through and local monetary targets in explaining inflation dynamics in Ghana. Annual data is obtained from International Financial Statistics, Organization for Economic Cooperation and Development, and Bank of Ghana’s Annual Reports. The aggregate time series used in the estimation are money (broad money supply, M2, defined as currency plus demand, time and savings deposits held by the public), real income per capita, and the real effective exchange rate. The UK consumer Price index is used as a proxy for the foreign price level since the UK has been Ghana’s largest trading partner over much of the data period. The Treasury bill rate is used as the domestic nominal rate of interest. The Consumer Price Index measures the domestic price level. Using Pesaran, Shin and Smith’s bounds testing approach to cointegration and an error correction model, the paper finds empirical evidence for both short and long run inflationary consequences from changes in monetary factors. The results indicate that changes in money supply, real effective exchange rate, nominal interest rate, real income per capita and foreign prices have a significant influence on the behavior and path of inflation in the long run. However, the short-run dynamics based on an error correction model shows that money supply has no significant impact on the rate of inflation. While real effective exchange rate and nominal interest rate have significant effects, the main driving force behind domestic inflation in the short-run appears to be import prices and real income per capita. The findings highlight the need for an alternative operational target such as the monetary conditions index or an explicit inflation-targeting framework to improve policy credibility.

Keywords: Inflation Dynamics; Exchange Rate; Central Bank; Ghana; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F31 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.53:year:2019:issue3:pp:229-237

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