The causal linkages among money growth, inflaion and interest rates in Ghana

Amankwah, Ernest and Atta Sarfo, Prince (2019): The causal linkages among money growth, inflaion and interest rates in Ghana.

Abstract

This study instigates the causal linkages among money growth, inflation and interest rate in Ghana. The essence of ensuring price stability, a considerable increase in money growth that enhances economic growth and development and favorable rate of interest that encourage domestic business and foreign direct investment cannot be over emphasized. The data was extracted from two main sources. The main variable under study were money supply, interest rate and inflation rate. Other variables that affect inflation rate such as exchange rate, real gross domestic product were controlled for. Data on money supply, interest rate and exchange rate Twere extracted from world development indicator (WDI) whereas data on inflation and the GDP growth were extracted from annual report of the Central Bank. The data comprises of of missed order of cointegration. That is I (0) and I(1). So bounds test of cointegration proposed by Pesaran, Shin and Smith (2001) was used. It was found out that money growth has both short run and long run relationship with inflation and all the other variables are insignificant in influencing inflation. The Granger causality test was conducted to help find the causality among the variables of interest. The null hypothesis that inflation rate does not does not Granger cause money growth was rejected at 5% which implies that there is a uni-directional causality between inflation and money growth. It was recommended that, in an attempt of reducing inflation both in the long run and short run, increase in money supply should be reasonable.

• Item Type: MPRA Paper
• Language: English
• Keywords: Money growth, Inflation and Interest rate in Ghana
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems

References

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Abradu-Otoo, P., Amoah, B., & Bawumia, M. (2003). An investigation of the transmission mechanisms of monetary policy in Ghana: A structural vector error correction analysis. Bank of Ghana, Working Paper, 2. Adu, G. and Marbuah, G. (2011). "Determinants of inflation in Ghana: An EmpiricalInvestigation". South African Journal of Economics Vol. 79 (3), 251-269. Ahiabor, G. (2013). The effects of monetary policy on inflation in Ghana. Developing Country Studies, 3(12), 82-89. Akcay, O. C., Alper, C. E., & Ozmucur, S. (1996). Budget deficit, money supply and inflation: Evidence from low and high frequency data for Turkey. Bogazici University Research Papers(12). Amarasekara, C. (2009). The impact of monetary policy on economic growth and inflation in Sri Lanka. Central Bank of Sri Lanka Staff Studies 38, pp. 1-44. Bassetto, M. (2002). A game–theoretic view of the fiscal theory of the price level. Econometrica, 70(6), 2167-2195. Bernanke, B. S., & Gertler, M. (1995). Inside the black box: the credit channel of monetary policy transmission. Journal of Economic perspectives, 9(4), 27-48. Chiaraah, A., & Nkegbe, P. K. (2014). GDP growth, money growth, exchange rate and inflation in Ghana. Journal of Contemporary Issues in Business Research, 3(2), 75-87. Cornish, S. (2017). Inflation and the Making of Australian Macroeconomic Policy, 1945–85, by Michael Beggs (Palgrave Macmillan, Basingstoke, 2015), pp. xii+ 325. Economic Record, 93(300), 174-176. DALHATU, A. (2012). MONETARY POLICY AND PRICE STABILITY IN NIGERIA (DECEMBER, 2006 THROUGH FEBRUARY, 2012). Dickey, D. &. Fuller, W.A (1979). Distribution of estimators for autoregressive time series with a unit root. J. Am. Statist. Assoc, 74, 427-31. Fisher, I. (1930). The theory of interest. New York, 43. Friedman, M. (1963). Inflation: Causes and consequences: Asia Publishing House. Gujarati, D.N. (2004): Basic Econometrics, 4th Edition, Tata Graw Hill Publishing Company Ltd., New York. Hendry, D. F., & Hubrich, K. (2006). Forecasting economic aggregates by disaggregates. Johnson, R. (2014). Fiscal deficit, money growth and Inflation dynamics in Ghana. reseach gate. Khabo, V. (2002). An evaluation of the impact of monetary policy on a small and open economy: The case of the Republic of South Africa. DCom diss., University of Pretoria. Leeper, E. M. (1991). Equilibria under ‘active’and ‘passive’monetary and fiscal policies. Journal of monetary Economics, 27(1), 129-147. Lozano, I. (2008). Budget deficit, money growth and inflation: evidence from the Colombian case: Banco de la República. Milton Friedman and A. Schwartz, A Monetary History of the United States 1867–1960, Princeton 1963. Mishkin, F. S. (2004). Can central bank transparency go too far? Narayan, P. K., Narayan, S., & Prasad, A. D. (2006). Modeling the relationship between budget deficits, money supply and inflation in Fiji. Pacific Economic Bulletin, 21(2), 103-116. Ocran, M. K. (2007). A modelling of Ghana's inflation experience: 1960-2003. Studies in Economics and Econometrics, 31(1), 119-144. Romer, D., & Chow, C. (1996). Advanced macroeconomic theory: Mcgraw-hill. Samuelson, P. A., & Nordhaus, W. (2010). Economics, 15e éd. New York. Sims, C. A. (1994). A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic theory, 4(3), 381-399. Vuyyuri, S., & Seshaiah, S. V. (2008). Budget deficits and other macroeconomic variables in India. Walsh, V. (2003). A theory of magnitude: common cortical metrics of time, space and quantity. Trends in cognitive sciences, 7(11), 483-488. Woodford, M. (2001). Fiscal requirements for price stability. Retrieved from