Key Determinants of Inflation in Ghana

Abstract

Inflation, and its deleterious effects on economies, has for long been the worry of governments especially among developing countries including Ghana. Several studies on the Ghanaian economy, have concluded that inflation in Ghana is purely a monetary phenomenon though in reality, the causes of inflation are numerous and vary. The main objective of this paper was to identify the key determinants of inflation in Ghana using the most recent monthly data from January 2000 to December 2014 (data period of 180 months). The study tested whether or not Crude Oil Price at the World Market, Exchange Rate, and Electioneering Spillover Quaternary Effects (ESQE) statistically affect inflation in Ghana either individually or jointly. The study found that crude oil price at the world market, exchange rate, and ESQE are key determinants of inflation in Ghana. The findings indicate a positive relationship between Crude Oil Price at the world market and Inflation, Cedi-Dollar Exchange Rate and Inflation as well as ESQE and Inflation (in the case ESQE, the study considered the first quarter of each post-election year within the data period). Each of the determinants: Crude Oil Price, Exchange Rate and ESQE was statistically significant at 1%. The study also indicated a high R-squared of more than 95% for the joint impact of all three determinants on inflation. This means that jointly, Crude Oil Price, Exchange Rate, and ESQE explain more than 95% of the variation in inflation in Ghana. The paper recommends further study into this subject matter by considering many other potential determinants of inflation in Ghana and the developing world as a whole.