Inflation, Foreign Direct Investment and Economic Growth in Ghana

Abstract

In spite of the lack of any concrete empirical study establishing the causal interaction between inflation, foreign direct investment and economic growth in Ghana, the Bank of Ghana since 2002 has been pursuing inflation targeting monetary policy at reducing inflation with the ultimate aim of achieving high and sustainable economic growth. This calls for this study which seeks to explore linkages between inflation, foreign direct investment and economic growth in Ghana using annual time series data covering the period 1980 to 2011. The study employs the cointegration approach by Pesaran, Shin and Smith (2001) and the Granger causality testing procedure suggested by Toda and Yamomanto (1995) to empirically examine the relationships and directional relationships between the variables. The study finds that GDP growth relates positively and negatively with foreign direct investment and inflation respectively both in the long run and short run. The relationship between inflation and foreign direct investment is positively. Furthermore, bidirectional causality was established between GDP growth and FDI, Whiles, a unidirectional causal links were found from GDP and FDI to inflation. There was no directional causal relationship inflation to GDP and FDI. Finally, a unidirectional causality was discovered running from GDP to inflation. All causal links were statistically significant. More attention should be paid to the growth of output on inflation because of the unidirectional causality running from real GDP growth to inflation. Higher level of output growth is very crucial to ensure price stability in Ghana. Therefore, for the fight against inflation to be winning, policies should be geared towards addressing the real economic factors that hinder GDP growth in Ghana. To maintain a sustainable economic growth, Ghana have to be encouraged and supported to attract more foreign direct investment to stimulate growth.