Analysing The Effects Of Macroeconomic Variables On Inflation In Ghana Using Distributed Lag Models

Abstract

The study examines the relation between inflation and some key macroeconomic variables such as money supply, interest rate, exchange rate, and GDP in Ghana. These macroeconomic variables are obtained from the Bank of Ghana spanning through January 1990 to December 2014. Data obtained were on monthly basis. However, it is only the GDP which was an annual data but had been transformed into monthly data. We use the Augmented Dickey-Fuller (ADF) technique; the Granger Causality Test Technique, the Autoregressive Distributed Lag (ARDL) Cointegration Technique, and the Error Correction Model (ECM) of the ARDL model are used to test for the existence of the short and long run relationship between inflation and the other variables. Unit root test is performed using the ADF test, the ARDL model is used in establishing the long-run relation between inflation and money supply, interest rate, exchange rate and GDP while the ECM is used to establish the relation between the variables and the level of significance used throughout the study is 5%. From the study, it is established that there exists a significant long-run and short-run relationship between inflation rate and money supply; this confirms the monetarist theory which says „inflation is everywhere a monetary problem‟, interest rate, exchange rate and GDP. The Granger-causality test used lag two (2). The test results show there is a unidirectional causal relation running from inflation rate to money supply, a unidirectional causality from interest rate to inflation. The results also suggest a non-directional causality between exchange rate and inflation rate and a bidirectinal causality between GDP and inflation rate.