Macroeconomic Determinants of Inflation in Ghana: An Empirical Analysis

Abstract

Formulating effective policy in developing economies requires a deep understanding of the complex interplay between macroeconomic variables and price levels. This study creates a detailed empirical model to explain price-level movements in Ghana using key determinants like money supply, fiscal balance, public debt, and exchange rate. Using quarterly time-series data from 1990 to 2023, the study employs Autoregressive Distributed Lag (ARDL), Vector Error Correction (VECM), and Vector Autoregressive (VAR) models to analyse short- and long-run relationships. The models confirm that the exchange rate and money supply are primary drivers of price levels. The ARDL model identified a significant long-run relationship, with an error correction term (-0.47) suggesting that 47% of deviations from long-term equilibrium are corrected quarterly. The VECM confirmed this long-run stability, while the Variance Decomposition analysis showed the exchange rate and money supply account for over 60% of changes in the Consumer Price Index (CPI) over a 10-period horizon. The findings highlight the critical need for Ghanaian policymakers to manage currency fluctuations and money growth to ensure price stability.