Antecedence of inflation in Ghana

Abstract

The study examines the antecedence of inflation, most especially the effect of money supply growth, interest rate and real depreciation of the cedi on inflation in Ghana using annual time series data from 1990 to 2016. An Autoregressive Distributed Lag model was adopted as the estimation technique to examine the long-run and short-run dynamics among the variables used. In the long run, the regression estimates indicated that there is an insignificant positive effect between money supply growth and inflation. However, interest rate in the long run was observed to have a positive significant effect on inflation in Ghana. Real depreciation of the cedi was also seen to have a negative insignificant effect on inflation. The short run results indicated that money supply growth had a positive insignificant effect on inflation; interest rate and real depreciation of the cedi were equally observed to have a positive significant effect on inflation in Ghana. From the results obtained money supply is not an integral part in the fight against inflation in Ghana. This confirms why the Bank of Ghana has shifted for monetary targeting to inflation targeting monetary policy. Therefore, to reduce inflation in the economy, immediate measures need to be adopted by the Central Bank to strengthen the effectiveness of inflation targeting as a monetary policy. A recommendation is made that the Bank of Ghana should continue to use interest rate as the major instrument in the conduct of monetary policy in Ghana. It is also recommended that measures should be implemented to reduce the depreciation of the cedi, through the reduction of budget deficit financing and reduction in external borrowing.