Inflation and Growth: Estimation of Threshold Inflation for Ghana

Abstract

The Central Bank of Ghana often come under severe criticism from the academia, policy and research institutions, think tanks, politicians and the general public with regards to the appropriateness of the choice of inflation level to target. These critics have often questioned the pursuit of single digit inflation by the Central Bank, often arguing that output growth would be unduly sacrificed at such low levels of inflation (single digit). This study therefore, attempts to investigate whether there exists a threshold in the relationship between inflation rate and real GDP growth for Ghana using annual data for the period 1970–2010. The paper employs standard econometric technique and finds an estimated 9 per cent threshold inflation for Ghana within the range 6.5–10.5 percent end year inflation target, but above the medium term target (6.5%) set by the Bank of Ghana. The finding suggests that targeting an inflation rate exceeding 9 percent will be deterrent to economic growth.