Amuakwa Mensah, Franklin
- University of Ghana
Abstract
In the present study, we examine the relationship between inflation and inflation uncertainty in Ghana from 1964:04 to 2012:12 using two-step procedure. At the first step, GARCH(1,2)-M model of monthly inflation data is estimated and the conditional variance from these estimates is used to as proxy for inflation uncertainty. Then, the Granger causality tests between actual inflation and our generated inflation uncertainty series are performed. Two main results follow from this paper. First, we find strong statistical support for the Friedman-Ball hypothesis: inflation significantly raises inflation uncertainty in Ghana over the full sample period and two subsamples at different lag lengths. Second, we also find evidence of inflation uncertainty affecting inflation in the long run as suggested by the Cukierman and Meltzer Hypothesis. Thus, results of this study have significant implications for Ghanaian Inflation Targeting (IT) efforts as well as the literature focusing on the relationship between inflation and inflation uncertainly in developing countries that are contemplating adopting inflation targeting. The policy implication is to aim at low average inflation rates in order to reduce the negative consequences of inflation uncertainty.
Keywords
GARCH Models; Inflation uncertainty; Friedman-Ball Hypothesis; Cukierman-Meltzer Hypothesis; VAR model
Published in
West African Journal of Monetary and Economic Integration
2014, volume: 12, number: 2, pages: 32-61
SLU Authors
UKÄ Subject classification
Economics
Permanent link to this page (URI)
https://res.slu.se/id/publ/61728