The effect of inflation on economic growth in Ghana
Abstract
ABSTRACT
Inflation is a sign that an economy is growing, however excessive rate of inflation is
detrimental as it can lead an economy into hyperinflation. Low inflation rates promote
economic growth by making prices and wages more flexible (Lucas, 1973). High inflation
is bad for the economy and it adversely affects economic performance. It hampers
economic growth due to the adverse impact on efficient distribution of resources by
changing relative prices (Fisher, 1993). The relationship between inflation and economic
growth is one of the most popular macroeconomic issues among central bankers, policy
makers and macroeconomists. This study therefore sought to examine the impact of
inflation on economic growth in Ghana. Specifically, the study estimated the causal
relation between inflation and economic growth and also measure the long run and short
run effect of inflation on economic growth. The study estimated a VECM model using
annual time series data on economic growth, CPI inflation, capital, foreign direct
investment and trade openness from 1980 to 2017. The study found the existence of a
unilateral positive causal relationship running from economic growth to inflation. Also, the
study found that inflation has a negative impact on economic growth in both the long run
and the short run. The study also found that capital and FDI also have a negative effect on
economic growth whereas financial development and trade openness have a positive effect.
The study recommends that government implement policies that ensures stable prices. This
can be in the form of making sure the inflation target set are not missed to ensure the
negative effects of inflation are reduced
Description
A Dissertation submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology in partial fulfilment of the requirements for the degree of MASTER OF SCIENCE IN ECONOMIC