Abstract
This study examines the asymmetric effects of inflation on inflation uncertainty in Ghana for the period 1963:4 to 2014:2. Exponential Generalized Autoregressive Heteroscedasticity (EGARCH) model is employed on monthly inflation rates to estimate inflation uncertainty. Two complementary approaches are used to determine the empirical relationship between inflation and its uncertainty. In the first approach, inflation dummy is included in the variance equation and in the second, we employ the two-step procedure in which Granger causality test is performed on the monthly inflation rates and the conditional variance generated from the EGARCH model. We find strong support for both Friedman-Ball and Cukierman-Meltzer hypotheses for the full sample as well as the inflation targeting period. Given the current build-up in inflationary pressures in Ghana, our results warn of possible costs of not keeping inflation in check. The major policy implication that follows from this study is that the Bank of Ghana should strive to minimize the gap between actual and target inflation levels so the public will have consistent belief in all announced policy targets.
Highlights
Inflation and its associated costs have attracted considerable research attention by both economists and politicians because of their detrimental effects on economic activities
The result from the variance equation, which indicates that inflation uncertainty varies directly with the rate of inflation in highly inflationary periods, provides an empirical support for the Friedman-Ball hypothesis
The Granger causality results from the two step procedure confirms the above finding as increases in the inflation rate “Granger-causes” greater inflation uncertainty
Summary
Inflation and its associated costs have attracted considerable research attention by both economists and politicians because of their detrimental effects on economic activities. In economies with greater inflation uncertainty, risk-averse economic agents will attempt to protect their portfolios by shortening the duration of contracts to. A. Barimah minimize the losses arising from shocks to inflation that are above their expectations [1]. Since saving and investing involve a contract of a kind, long-term economic growth is expected to be lower when economic agents decide to reduce their savings and investment when faced with greater inflation uncertainty. As inflation becomes highly unpredictable, saving, investment and growth of real output suffers. By imposing costs on economic agents who strive to extract the correct signal about relative from absolute prices, real time is devoted to unproductive economic ventures [2]
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