Does inflation uncertainty hurt domestic investment? Empirical evidence from Ghana

Abstract

This paper empirically investigates the effect of inflation uncertainty on domestic investment in Ghana. In addition, it investigates the differential impacts of permanent and transitory inflation uncertainty on investment in Ghana. Inflation uncertainty was measured using the conditional variance generated from the generalized autoregressive conditional heteroscedasticity (CGARCH (1, 1)) model. Employing the autoregressive distributed lag (ARDL) estimator on data covering 1970 to 2020, the results provide strong evidence that inflation uncertainty, associated with high volatility in commodity prices, hampers domestic investment in Ghana. After disaggregating total inflation uncertainty into two components, this paper finds that permanent inflation uncertainty has a stronger adverse effect on domestic investment than does transitory inflation uncertainty. Additionally, the results reveal that domestic interest rate, foreign interest rate, government expenditure, and trade openness are also important factors that significantly affect investment in Ghana. Given the economic implications of these results, this paper offers actionable policy recommendations to improve investor confidence and spur domestic investment in Ghana.

Keywords:

• domestic investment
• permanent and transitory inflation uncertainty
• CGARCH
• ARDL
• Ghana

JEL:

• E22
• E31

PUBLIC INTEREST STATEMENT

Expectations to changes in prices is key to business decision making. This is because such prices changes have direct impact on the returns on investment. This study empirically investigates the effect of inflation uncertainty on domestic investment in Ghana. By decomposing inflation uncertainty into permanent and transitory, the study also investigates the differential impacts of permanent and transitory inflation uncertainty on investment in Ghana. The findings show that inflation uncertainty hinders domestic investment in Ghana. After disaggregating total inflation uncertainty into two components, this study finds that permanent inflation uncertainty has a stronger adverse effect on domestic investment than does transitory inflation uncertainty. Additionally, the results reveal that domestic interest rate, foreign interest rate, government expenditure, and trade openness are also important factors that significantly affect investment in Ghana. Given the economic implications of these results, this paper offers actionable policy recommendations to improve investor confidence and spur domestic investment in Ghana.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Kofi Kamasa

Kofi Kamasa is an Economist, Researcher and Senior Lecturer at the Department of Management Studies, University of Mines and Technology, Tarkwa. He holds both Ph.D. and MPhil in Economics from the Kwame Nkrumah University of Science and Technology, Kumasi. He has taught several postgraduate courses including Monetary Economics, Quantitative Methods, International Finance, Managerial and Business Economics, and Financial Econometrics among others. His research areas include Monetary & Financial Economics; Economic Growth; International Trade & Finance and Public Finance.

Eunice Efua Kpodo

Eunice Efua Kpodo is a Funds Transfer Officer at Guaranty Trust Bank, Ghana Ltd. She holds Master of Science degree in Industrial Finance and Investment from the Kwame Nkrumah University of Science and Technology, Ghana.

Isaac Bonuedi

Isaac Bonuedi is Development Economist and Research Fellow at the Bureau of Integrated Rural Development (BIRD), Kwame Nkrumah University of Science and Technology (KNUST), Kumasi, Ghana. He holds a Ph.D. (with a specialty in Development and Applied Agricultural Economics) from the University of Bonn, Germany.

Priscilla Forson

Priscilla Forson is an Assistant Lecturer at the Department of Management Studies, University of Mines and Technology. She has BA. and MPhil Economics degrees from Kwame Nkrumah University of Science and Technology, Kumasi, and currently a PhD student at University of Cape Coast, Ghana. Her research interests are in the areas of Industrial Organisation and Development, Energy Economics, International Trade and Finance, and Monetary Economics