Public sector wage, inflation and exchange rate depreciation in Ghana

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MAY, 2016
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Exchange rate depreciation and price instability in Ghana have become alarming sparking a lot of debates in recent times among researchers, policy analyst, academicians, politicians and the public at large. While some attribute these problems to economic mismanagement and corruption among other factors, others maintain the overwhelming situation could be the result of the high wage bill. This paper aims mainly at determining empirically the impact of public sector wage bill on inflation and how inflation influences exchange rate depreciation in Ghana. An annual time series secondary data for the period 1986- 2014 was employed for the study using the Auto Regressive Distributed Lag (ARDL) model. The results suggest that public sector wage bill- GDP and exchange rate depreciation relate positively to inflation both in the short run and in the long run. A positive relationship between inflation and public wage- expenditure was also established in the long run and a negative relationship in the short run. This affirms the position that though inflation is mainly driven by monetary expansion, other factors like wages as component of fiscal activities are vital sources. On a different facade, inflation, pubic wage-GDP and public wage- expenditure have a significant negative impact on exchange rate depreciation in the long run. However, public wage- expenditure and inflation exert a positive impact on exchange rate in the short run with public wage- GDP imposing a negative effect. This maintains the negative effect of wage- inflation on exchange rate in Ghana. The study thus suggested that, as monetary policy receives much priority, fiscal policy, an obvious alternative requires equal attention for a sustained exchange rate and price stability.
A thesis submitted to The Department of Economics, in partial fulfillment of the requirement for the award of a Master of Philosophy Degree in Economics (Mphil Economics).