An empirical analysis of inflation dynamics in Ghana: how important are real and nominal shocks?
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Date
2016-10-25
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Abstract
The study analyzed the relative importance of real and nominal shocks in explaining
inflation dynamics in the Ghanaian economy using the Structural Vector Autoregressive
(SVAR) model. Specifically the study sought to analyze the response of inflati on to
output and money supply shocks in Ghana which are proxies for the real and nominal
shocks respectively. The analysis and the reported findings of the study were based on
quarterly data spanning the period 1980Q1 to 2012Q4. The complete annual nature of the
real GDP was disaggregated into quarterly frequencies through the use of Ecotrim
software. With the imposition of short run restrictions, the study confirmed the increasing
importance of inflation being a structural rather than a monetary phenomenon since
inflation tend to be more responsive to real rather than nominal shocks in the short run.
Inflation remained relatively stable in response to money supply and exchange rate
shocks whiles it declined by a greater magnitude in response to a positive output (real)
shock. It was also found that, the dominant importance of inflation inertia, inflation
responded positively between 0% and 100% to inflation persistence. This was further
buttressed from the variance decomposition as inflation persistence explained more than
60% of the variations in inflation while the combined effect of output and money
explained less than 40% in the short run. It is worth noting that other policy meted out
which have real effects on the economy would be advantageous to reducing inflation,
however inflation targeting policy tools which have real effects on the economy would
only be successful after the 11
th
quarter period as inflation becomes insensitive to real
shocks after this period.
Description
A thesis presented to the Department of Economics College of Humanities and Social Sciences in partial fulfillment of the requirement for the award of the degree of Master of Philosophy in Economics
Keywords
Inflation, Real Shock, Nominal Shock, Inflation Inertia, SVAR, Ghana