Inflation, Exchange Rates and Interest Rates in Ghana: an Autoregressive Distributed Lag Model

Abstract

This paper investigates the impact of exchange rate movement and the nominal interest rate on inflation in Ghana. It also looks at the presence of the Fisher Effect and the International Fisher Effect scenarios. It makes use of an autoregressive distributed lag model and an unrestricted error correction model. Ordinary Least Squares regression methods were also employed to determine the presence of the Fischer Effect and the International Fisher Effect. The results from the study show that in the short run a percentage point increase in the level of depreciation of the Ghana cedi leads to an increase in the rate of inflation by 0.20%. A percentage point increase in the level of nominal interest rates however results in a decrease in inflation by 0.98%. Inflation increases by 1.33% for every percentage point increase in the nominal interest rate in the long run. An increase in inflation on the other hand increases the nominal interest rate by 0.51% which demonstrates the partial Fisher effect. A 1% increase in the interest rate differential leads to a depreciation of the Ghana cedi by approximately 1% which indicates the full International Fisher effect.