Essays on sectoral inflation persistence and threshold differentials in Ghana
Thesis (PhD)--Stellenbosch University, 2018.
ENGLISH SUMMARY : This study empirically identifies various sector-specific threshold inflation levels in Ghana with annual and monthly data covering the period 1960 to 2017. The results of the assessment have been compiled into four essays. The first essay reviews Ghana’s inflationary history from pre-independence to the current era and assesses the myriad of historical monetary policy frameworks and inflation management tools employed by successive political regimes. Average inflation of 31% was recorded during the monetary targeting regime up to 1991 where credit controls were instituted. Over the next decade, with the adoption of open market operations (OMO), average inflation dropped to 28%. Similarly, prior to the formal adoption of inflation targeting (IT) in 2007, average inflation further declined to 15% between 2002 and 2006. Since the formal adoption of IT, a one percentage point drop in average inflation to 14% was recorded. Overall, a consistent decline in average inflation has been witnessed across the different policy frameworks. Decadal and 5-year analyses of Ghana’s inflation since 1960 also confirm the overall downward trend of Ghana’s inflation to the present day. Since 2012, a burgeoning of a creeping inflationary spiral is evident. Recently, from 2014 the economy ushered in a new spell of moderate inflation with average annual inflation being 16%. We identify Ghana’s foremost macroeconomic problem as inflation persistence. The second essay tests for the presence of threshold effects in Ghana’s headline inflation. It uses Regime Switching Threshold Autoregressive and Smooth Transition Regression Models to identify inflation thresholds and their effects on output growth. The findings suggest threshold effects exist within Ghana’s inflation, with the estimated threshold at 11%. Expected switching probabilities of inflationary regimes are also estimated. We find a 97% chance of a high inflation regime succeeding a low inflationary period and a 3% chance of a low inflation period succeeding a low inflation period. There exists a 94% likelihood of succession from one high inflationary period to another and a 6% chance of transition from a high inflation era to a low one. While the Ghanaian economy can remain in a continuously low inflation era for no more than one year, it will take approximately 37 years to exit any high inflation spell it enters. This essay particularly makes a contribution by adding to the very scanty threshold inflation non-linearity literature on Ghana The third essay examines Inflation Persistence (IP) in Ghana. In doing so it employs Stock’s (1991) 95% confidence interval for the largest root of the autoregression and identifies a reduction in inflation persistence during low and stable inflationary episodes in Ghana, as well as an increase in persistence during higher levels of inflation. We adopt the Dornbusch-Fisher (1993) framework to the case of Ghana in mapping out moderate persistent spells of inflation between 1960 and 2015. We find evidence of a reduction in inflation persistence after the introduction of the Structural Adjustment Program (SAP) of the 1980s. Moreover, the Central Bank’s formal adoption of the inflation targeting framework in 2007 similarly led to a fall in inflation persistence across the aggregate economy. At the sectoral level, Ghana’s food sector is the most affected by IP. We empirically examine the effectiveness of historical policy interventions on aggregate and sectoral IP and find dwindling levels of effectiveness over time. Lastly we compare Ghana’s inflation persistence with other economies and conclude that in pursuing single digit inflation, policy makers should continuously monitor inflation persistence. Based on its findings, this essay also contributes to literature by taking a first pass on which strand of the inflation-growth non-linearity literature that sectoral inflation data subscribes to. The fourth essay tests for the presence of inflation inertia and threshold effects in sectoral inflation in Ghana. It uses Regime Switching Threshold Autoregressive and Smooth Transition Regression Models to identify thresholds and also the effect of sectoral inflation on sectoral output growth. The findings suggest that threshold effects exist within Ghana’s sectoral inflation, with estimated thresholds of 11.5%-15.2% and 13% for the food and non-food sectors respectively. In the food sector, while no threshold is identified for the dry season, a markedly differing threshold of 6.1% is identified for the rainy season as general food prices in Ghana drop during periods of sustained rainfall. Inflationary expectations (inertia) are evident in the non-food sector and serve as a key determinant of non-food output growth in Ghana. Using Markov Switching models, expected durations and expected switching probabilities of inflationary regimes are also estimated. This paper contributes to literature by pioneering the probe of threshold inflation non-linearity at the sectoral level of an economy. The combined evidence in this thesis quite strongly indicates the failure of Ghana’s current inflation targeting framework in catering for sectorial differences within the economy. Clearly, inflation targets are seldom met, and persistence in inflation is increasing to pre policy implementation levels at both the aggregate economy and the food and non-food sectors. The output potential of Ghana’s sectors as well as the long term success of the inflation targeting framework is therefore in jeopardy if urgent interventions are not effectively implemented.
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