Abstract
This study sought to model rates of inflation in Ghana using the Autoregressive Conditional Heteroscedastic models. In particular, the ARCH, GARCH and EGARCH models were compared. Monthly rates of inflation from January 2000 to December 2013 were used in the study with the rates from January 2000 to December 2012 serving as the training set and January 2013-December 2013 serving as the validation set. The result revealed that the EGARCH (1, 2) model with a mean equation of ARIMA (3, 1, 2) × (0, 0, 0)12 was appropriate for modelling Ghana's monthly rates of inflation. A one year out-of-sample forecast for the year 2014 shows that Ghana would experience double digit inflation with an end of year inflation rate of 15.0% and a margin of error of 0.9%. This study would inform and guide policy-makers as well as investors and businessmen on management of expected future rates of inflation.
Highlights
Price stability is one of the main objectives of every government as it is an important economic indicator that governments, politicians, economists and other stakeholders use as basis of argument when debating on the state of the economy (Suleman and Sarpong, 2012)
The volatility in the consumer prices of some selected commodities in the Nigerian market were examined by Awogbemi and Oluwaseyi (2011) and the results showed that Autoregressive Conditional Heteroscedastic (ARCH) and GARCH models are better models because they give lower values of Akaike Information Criteria (AIC) and Bayesian Information Criteria (BIC) as compared to the conventional Box and Jenkins ARIMA models
The Augmented Dickey-Fuller (ADF) and PhilipsPerron (PP) tests were performed and the results shown by Table 1 indicated that the series were not stationary over the period
Summary
Price stability is one of the main objectives of every government as it is an important economic indicator that governments, politicians, economists and other stakeholders use as basis of argument when debating on the state of the economy (Suleman and Sarpong, 2012). David (2001) described inflation as a major focus of economic policy worldwide. This is rightly so as inflation is the frequently used economic indicator of the performance of a country’s economy due to the fact that it has a direct effect on the state of the economy. In Ghana, the debate on achieving a single digit inflation value has been the major concern for both the government and the opposition parties. Despite the different opinions on the inflation figures, it is important to point out that, both the government and the opposition parties are concerned about the inflation (general level of prices) in the country as it affects all sectors of the economy. Hall (1982) expresses inflation as a situation where the demand for goods and services exceeds their supply in the economy
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