Dollarization, Inflation Targeting, and Inflationary Dynamics in Ghana

ABSTRACT

The impact of dollarization on domestic economic performance, and the welfare implications of high inflation in an inflation targeting environment, have remained a matter of much concern for policymakers in recent years. This study investigates the effects of dollarization on inflation and inflation uncertainty in Ghana for the period January 1990 to December 2017. We apply the exponential Generalized Autoregressive Conditional Heteroskedasticity model together with impulse response and Granger causality tests to explore how dollarization affects the behavior of inflation for the pre-inflation targeting period (January 1990 – May 2007) and post-inflation targeting period (June 2007 – December 2017). The results indicate that dollarization has not played a significant role in the volatility of inflation in Ghana. Also, inflation Granger causes dollarization in both the pre- and post-inflation targeting regimes. Finally, there is a bidirectional causal relationship between inflation and inflation uncertainty following the adoption of inflation targeting monetary policy. We conclude that, although inflation targeting has not presented a significant impact on inflation volatility, it has affected the relationship between inflation and inflation uncertainty in Ghana. The dynamics of inflation volatility and asymmetries present crucial implications which are discussed to guide policymaking.

KEYWORDS:

• Dollarization
• inflation targeting
• inflation
• Volatility
• Exponential GARCH
• Ghana

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The Centre for Economic Policy Analysis (CEPA) in 2009 attributed the downward inflationary trends to factors including the aid inflows as well as debt relief and cancellations associated with the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI), and inward private foreign direct investments (CEPA, 2009). According to Marbuah (2011), the downward trend could be due to the ability of the inflation targeting framework adopted by the monetary authorities in Ghana since May 2007 to anchor inflationary expectations. See, inter alia, Alagidede et al. (2014), Adu and Marbuah (2011), Ocran (2007) for a more detailed analysis .

² The countries in the study are Argentina, Bolivia, Cambodia, Chile, China, Ecuador, Indonesia, Israel, Korea, Lao PDR, Malaysia, Peru, Philippines, Russia, Thailand, Uruguay, and Vietnam.

³ A proxy is used for inflation targeting. The months preceding the implementation of inflation targeting (that is, from 1990:01 to 2007:05) take 0 and the months after the inflation targeting (2007:06 to 2013:12) take on 1.