When is Inflation Harmful? Estimating the Threshold Effect for Ghana

Abstract

Problem statement: Is inflation harmful? At what level? For all countries, both developed and developing, one of the fundamental objectives of macroeconomic policy is macroeconomic stability. In Ghana monetary and fiscal policies are aimed at sustaining high economic growth rates together with low inflation (price stability). Approach: This study estimated the threshold effect of inflation in Ghana for the period 1960-2008 using threshold regression models designed to estimate the inflation thresholds instead of imposing them. Results: We found evidence of a threshold effect of inflation on economic growth in Ghana. The result indicates inflation threshold level of 11% at which inflation starts to significantly hurt economic growth in Ghana. Below the 11% level, inflation is likely to have a mild effect on economic activities, while above this threshold level, inflation would adversely affect economic growth. Conclusion: The study concluded that the current medium term inflation target of 6-9% annual average set by the Bank of Ghana and the Government respectively is well below the 11% threshold is in the right direction.