Ghanaian Inflation and Income Dynamics: Evidence on Volatility and Neutrality

boughabi, houssam (2025): Ghanaian Inflation and Income Dynamics: Evidence on Volatility and Neutrality.

Abstract

The paper explains how inflation, monetary policy, and fiscal interventions interacted in Ghana from 2005 to 2014. A discrete-time macroeconomic model with money supply, taxation, household consumption, GDP per capita, and price adjustments as variables has been developed. The paper uses FIGARCH and GARCH models to investigate the volatility of inflation to decide if it has long-memory properties. The empirical findings show that the fractional differencing parameter $d = 0$ (Hurst exponent $H = 0.5$), which means that there is no persistent long-range dependence in inflation volatility. Hence, a standard GARCH(1,1) model is sufficient to describe short-term volatility dynamics, and shocks to conditional variance occur immediately but subside rapidly. Besides that, the research determines a monetary-fiscal neutrality threshold, which highlights the equilibrium where income growth balances the inflationary pressures; this threshold is assessed macroeconomically into general prices and compared to actual general prices to evaluate its validity. The results indicate that inflation in Ghana during this period is mainly of short-memory nature, thus reaffirming the role of short-term monetary and fiscal operations in price stabilization, and confirming the successful validation of the macroeconomic neutrality threshold linking income growth and price stability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation volatility, statistical modelling, monetary transmission, threshold modeling, Ghanaian economy
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

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