The transition probabilities for inflation episodes in Ghana

Author:

Adom Philip KofiORCID,Agradi Mawunyo Prosper,Quaidoo Christopher

Abstract

Purpose Following the reforms in monetary policy and shift in fiscal policies, it is logical to presume that these reforms may cause a significant structural change in the dynamic processes of inflation and hence affect the nature of inflation persistence. The purpose of this paper is to examine the persistence nature of the different inflation episodes while controlling for the effects of demand- and supply-side factors, which are modeled as regime-dependent. Design/methodology/approach This paper used the Markov-switching dynamic regression and annual time series data. Findings The results showed that high inflation regime is more persistent than low inflation regime, with a respective average duration of an escape of 3.5 and 2.57 years, which suggests that price stability achievements are less sustainable. In both regimes, demand- and supply-side factors play significant roles in driving inflation, but the effect of the latter dominates. Thus, on the argument of whether inflation in Ghana is structural or monetary, the results support the former. The roles of both structural and monetary factors have changed over time, but that of the former has been more significant and important in Ghana. Originality/value This study provides the first empirical attempt, in the case of Ghana, that examines the persistence nature of different inflation regimes, while modeling the effects of supply and demand factors as regime dependent. In the modeling sense, the authors also contribute by ruling out the assumption that the researcher knows the processes responsible for each observation at each point in time.

Publisher

Emerald

Reference57 articles.

1. Impact of market-based policies and external fiscal discipline on Ghana’s inflation;Review of Development Economics,2016

2. Analysing inflation dynamics in Ghana;African Development Review,2015

3. Determinants of inflation in Ghana: an empirical investigation;South African Journal of Economics,2011

4. Central bank independence and inflation in Africa: the role of financial systems and institutional quality;Central Bank Review,2017

5. The Ghanaian economy: an overview;Ghanaian Journal of Economics,2013

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