Single-Digit Inflation Targeting and Economic Growth

Abstract

In recent times, most central banks have adopted inflation-targeting monetary policy approach aimed primarily to achieve single-digit inflation. Though, the literature suggest that low level of inflation promotes economic growth, the literature is silent on the threshold inflation level needed to promote growth. Studies in developing countries that seek to estimate the threshold level of inflation that promotes economic growth do not support single-digit inflation level. The question that arises is whether single-digit inflation support economic growth. The study thus investigate whether single-digit inflation has any positive effect on economic growth and whether inflation-targeting policy promotes economic growth. The study used annual time series data spanning from 1965 to 2011 for Ghana. Using autoregressive distributed lag model technique, the study found that single-digit inflation has no significant effect on economic growth both in the short and long run. However, the findings of the study supports inflation targeting policy as growth enhancing tool in both short and long run.