Policy consistency and inflation in Ghana

Nil K. Sowa

Working Papers from African Economic Research Consortium

Abstract: Inflation appears to be the macro-problem in Ghana for which no antidote has been found under the economic recovery programme. It is possible that either a wrong diagnosis has been made of the problem, or that certain factors within the economy are preventing inflation from staying within target levels. Using an error-correction model (ECM), the paper estimates an inflation equation for Ghana. The convenience of this model is in the fact that all the data series exhibit an autoregressive scheme of order one: that is they are 1(1) series. In such an instance the Granger-Engle Theorem shows that the ECM provides the most efficient model. Further, the ECM unveils some of the short-run dynamics which are missing in other estimation techniques. The results of the econometric regression showed that inflation in Ghana, in either the long run or the short run, is influenced more by output volatility than by monetary factors. An examination is made of the consistency of fiscal deficits. The hypothesis is that an unsustainable fiscal policy would make government miss some macroeconomic targets. It is shown that in 1985 and 1989, fiscal policy was consistent. Inflation was well within target in 1985. For 1986-1988, the government did not maintain consistent fiscal deficits, and inflation in those years was well above targets. It is recommended that to control inflation in Ghana, more attention should be paid to supply factors. Further, government should pursue consistent fiscal policies.

Date: 1996-03
Note: African Economic Research Consortium
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