An empirical investigation on the determinants of inflation in Ghana

Ghana uses an inflation target of 8% as a monetary policy objective to control against double-digit inflation. The main reason for controlling inflation is to reduce the cost of living, poverty levels, and to ensure macroeconomic stability in Ghana. However, to control inflation successfully, the government must rely on empirical findings for policy formulation. Therefore, this study was conducted based on three main objectives. Firstly, to investigate determinants of inflation using Granger causality approach. The second objective of this study was to determine the impulse reactions of government expenditure, exchange rate, population, broad money, and crude oil prices to inflationary shocks using impulse response analysis. Finally, the study sought to ascertain the proportion of variability in inflation that is caused by the independent variables using variance decomposition analysis. Data spanning 1990 to 2018 were used to run the autoregressive distributed lag (ARDL) model and the results were reported. The findings from Granger causality tests show that, population and government expenditure determine inflation in both the short-and long-run. Another finding from the impulse response analysis reveal that the exchange rate, broad money supply, and population react negatively to inflationary shocks in the long-term while government expenditure and crude oil prices react positively to inflationary shocks in the long-term. In addition, the variance decomposition analysis shows that inflation explains about 80% of the variability in itself and 20% is explained by government expenditure, the exchange rate, population, broad money, and crude oil prices. Based on these findings, the study recommends that in order to control inflation, government should pay attention to both population and government expenditure