Price Stability and the Growth Maximising Rate of Inflation for Ghana

Abstract

Monetary policy in Ghana, which is typical of many central banks, over the years, has focused on ensuring price stability or low inflation. The aim of the policy of price stability is to provide a stable environment for real sector activities to flourish. However, the outcome of the policy on real sector activities has not been subjected to any empirical investigation and this forms the focus of the study. For instance, the Central Bank has focuses on single digit inflation and whether such a low rate is growth maximizing is yet to be ascertained. The study therefore investigates the revenue maximising and the ‘growth maximizing’ rate of inflation for Ghana using data from Bank of Ghana and WDI. The study finds that economic performance is higher under low inflation era than when inflation is high. It also established revenue maximizing rate of inflation using the Laffer curve approach is lower than the growth maximizing rate of inflation. Also, from the results, it can be deduced that the single digit inflation target set by the Central Bank is not growth maximising.