An empirical analysis of inflation dynamics in Ghana: how important are real and nominal shocks?

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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 inflation 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 11th quarter period as inflation becomes insensitive to real shocks after this period. Key Words: Inflation, Real Shock, Nominal Shock, Inflation Inertia, SVAR, Ghana
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, 2016