Analysing Inflation Dynamics in Ghana

Abstract

The study analyses the roles of external and internal factors in explaining Ghana's inflation. Contrary to previous attempts, we adopt a more robust technique which corrects for both serial correlation in errors and endogeneity in regressors. The study proceeds to derive consistent estimates based on the general-to-specific modelling search technique. The study establishes the statistical importance of the money supply, interest rate and crude oil price in the long run. According to the result of the study, there is significant intra-continental transfer of inflation between Ghana and Ivory Coast. In the baseline regression, we did not establish the theoretical expectation of output growth and the statistical significance of policy regime change. However, after correcting for the endogeneity problem, we establish the theoretical expectations of output growth and the statistical significance of policy regime change. The Economic Recovery Programme caused inflation to fall by 0.018 per cent. The result further shows that a more food secured state is anti-inflationary. As an anti-inflationary strategy, government should increase support to the agricultural sector to help boost domestic production. Investing and exploring other cheap fuel types are important for the economy's resilience to adverse shocks on the international crude oil market. Lastly, government should commit to developing sound economic policies that will enhance the economy's resilience to external shocks.