Regional Analysis of Inflation Dynamics in Ghana: Persistence, Causes and Policy Implications

Project Active from to State and Macroeconomics

Welfare implications of aggregate inflation are fairly well-documented in the literature and are also fairly intuitive. However, the potential welfare losses that can be attributed to inflation (and persistence of inflation) in sectors that can be considered to be core/necessities are, arguably, likely to be higher, for example, food and fuel. At the same time, keeping inflation to acceptable limits is no longer just the goal of domestic price stability, but also a requirement for considering the feasibility of a monetary union. This study examines the crucial issue of persistence in inflation in Ghana in order to inform welfare and policy implications thereof. Specifically, the study investigates the existence of persistence at both aggregate (national) and regional levels. Moreover, the study includes investigation of persistence across sectors (including food and fuel), hence spanning both core and headline inflation persistence.

A number of questions not properly interrogated in the literature are analysed. First, are there significant asymmetries in the regional and sectoral inflation levels in Ghana? Second, what could be the likely causes of potential asymmetries in inflation persistence (regional and sectoral) in Ghana? Third, if, indeed, regional and/or sectoral asymmetries in inflation persistence exist, where is it prevalent and in which sectors? Finally, we posit the potential causes and the possible/likely macroeconomic implications vis-à-vis regional poverty, government macroeconomic policy, support, and regulation/controls.

Employing various measures of persistence including Fractional Integration (FI) and half-life methods, the empirical part of the study presents robust arguments and results which are then discussed, aiming to inform policy formulation. We surmise that Inflation at the micro level can affect the ‘poor’ more, and, thereby, impact economic growth and/or economic development. To this end, if governments and policymakers have more knowledge about the sectors and regions where inflation (persistence) is higher, then policies can be targeted to address growth issues for sustained economic development including areas such as government infrastructure planning, provision and support; regulation and price interventions; and competition monitoring. Finally, based on our results, we will be in a better position to comment on how ‘one-size-fits-all’ policies in an environment of inflation asymmetries could yield sub-optimal results, which aside of being a drain on Ghana’s scarce resources, may worsen within-country (regional) inequality. The outcomes of this investigation should go some way to provide robust information, based on empirical analyses, needed to address previaling economic development and growth issues. To this end, the results of this study would provide policy directions to end users such as the Bank of Ghana, the Ministry of Finance and Economic Planning, the Ministry of Energy, the International Growth Centre among other stake holders.