Historical Inflation Ghana Interest Rates During Inflationary Period (Essay Sample)

Research paper
Historical inflation In Ghana
And
The root causes
Research an historical example of inflation (greater than 10% in the US or greater than 15% in any other country): Analyze the root causes of the inflation. Describe interest rates during the inflationary period. Explain how they were able to control the inflation (if they were)
Historical inflation In Ghana and the root causes.
Introduction
Inflation persistence has been a problem in developing countries (Winkelried, 2005). Due to the link between inflation and economic growth, much ink has been poured on the literature that studies these two closely watched macroeconomic variables in developing countries (Bick, 2010). The relationship between inflation and growth is however more complex than envisaged and calls for further research.
Which categorizes into four distinct strands, the predictions from extant literature regarding the inflation-growth nexus aptly highlights the complexity. In the first strand pioneered (Tobin, (1965), inflation has a positive effect on long-run growth; the second strand posits that inflation has no effect on growth (Sidrauski, 1967); the third strand in the literature points to a negative effect of inflation on long-run growth (Stockman, 1981) and the fourth strand suggests that a nonlinear relationship exists where if inflation rises above a threshold level, it has a negative effect on long-run growth (Huybens and Smith, 1998).
This complexity has implications for optimal inflation policy and inflation targeting (Nobay, 2000). Consequently, there is considerable debate surrounding the optimal inflation rate for these economies. While some consensus does exist in literature, suggesting a non-linear relationship between inflation and economic growth (Gillman et al., 2003), there are still substantial views on a linear relationship between inflation and growth (Fischer, 2001).
As noted earlier inflation persistence and the management of it has been a challenge for developing countries particularly those in Africa (Phiri, 2016). Ghana is one of such developing countries in Africa where inflation persistence and its management has been a problem (Marbuah, 2011). Ghana has had a chequered history with inflation. This describes Ghana’s inflation experience since its independence in 1957 as episodic. He isolates four distinct episodes: the immediate post-independence, national reconstruction and development phase (1957-1966), the first International Monetary Fund (IMF) supported-stabilization phase (1967-1971), the deterioration phase (1972 to 1982), and the second stabilization inflation phase (1983-2003).
There also appear to be a nonlinear relationship between inflation and growth, however the nature of this relationship and the consequent possible thresholds is rather inconclusive from the few studies existing on Ghana (Ahortor et al., 2012).
Moreover, all the four papers mentioned above failed to test for the direction of causality between inflation and growth, and thus, a potential bias could exist if causality runs from growth to inflation or less seriously, an indigeneity crisis if the reverse is the case (Khan, 2001). Furthermore, as huge variations exist within their estimated thresholds, we revisit their studies, by testing for the direction of causality, after which we push the frontiers of research by extending the analysis to the estimation of the inflation thresholds at the sector-specific level.
No empirical study has been carried out to ascertain the inflation threshold level within the various sectors of an economy, much less the Ghanaian economy (Chaudhry et al. 2013). It is therefore crucial that a line of studies open up which focus on sectorial threshold inflation levels, as the nationwide inflation target band set by the central bank may favour only certain sectors of the economy, to the detriment of other sectors, thereby unduly sacrificing sectorial output growth. Evidently, in the same manner that cross-country inflation threshold studies fail to recognize the idiosyncrasies of the various countries within the study, nationwide inflation threshold studies also fail to recognize the idiosyncrasies of the various sectors within the economy.
The economy of Ghana exhibits sectorial and regional variations which uniquely drive economic activities. Inflation data from the Ghana Statistical Office clearly reveal these variations. The varied inflationary nature of the sectors the economy go on to reiterate the fact that a single economy-wide inflation target for all these different sectors may not be meaningful for the optimal growth of Ghana’s economy. This shows that once Ghana’s data is disaggregated, the various sectors possess very differing dynamics. Thus, it is evident that a single inflation target system would not appropriately cater for these variations. In the food sector in particular, a biannual rainy cycle is experienced and observed as two distinct rainy seasons. With this cycle, general food prices drastically fall in the major season, between April and mid-July, while a less rapid fall in food prices is witnessed in the minor season, between September and mid-November. Moreover, between the northern and southern farming hubs of the country, these rainy cycles do not occur in tandem. Since Ghana’s food sector is majorly rainfall-dependent, it is highly probable that each region or sector will thus have optimal inflation rates which are growth enhancing, and yet distinct from the aggregate target. However no prior attempt has been made to estimate sector-specific inflation thresholds.
The intuition behind sector-specific analysis particularly for the Ghanaian economy is multifaceted, and intertwines with the motivation and significance of this study. For instance, while aggregate inflation data seems to suggest a harmony with the fourth theoretical strand of threshold nonlinearity, it could well be that disaggregated or sectorial data might exhibit compatibility with an alternate theoretical strand, or possibly, none of the strands identified (Drukker et al. , 2005). This paper thus assists in determining which theory is affirmed when sectorial inflation data is employed.
In addition, the dual nature of the Ghanaian economy as well as its very diverse sectorial variations imply that a single economy-wide inflation target may not be meaningful in attaining optimum growth (Heintz, 2011). Certain sectors may still be able to contribute much more to Ghana's economic growth in far higher rates of inflation above the so-called econo...