Examining the Threshold Effects of Inflation on Economic Growth in Ghana

Author(s):

Yakubu Awudu Sare^a, Muazu Ibrahima^* and Alhassan Musah^b

imuazu@uds.edu.gh
2024-08-01 04:41:41

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Abstract

Promoting sustainable economic growth and maintaining relative price stability comprise the two core macroeconomic policy objectives pursued by Central Banks in several economies, including Ghana. Hitherto, majority of the empirical studies on inflation-growth nexus argues that the impact of inflation on economic growth is non-linear with the precise impact of inflation conditioned on the threshold level. However, earlier literature on the threshold effects of inflation on economic growth relied on rudimentary approach by introducing a quadratic term of inflation into the growth equation without showing how the link is moderated by potential refereeing variables. In this study, we depart from this elementary approach in examining the threshold effects of inflation. We find that inflation-growth nexus is mediated by the level of broad money supply. While inflation negatively affects overall growth, our evidence suggests that, inflation significantly inhibits economic growth when the broad money supply exceeds a threshold of 21.57% of GDP. Below this threshold, the impact of inflation is benign. We discuss key implications for policy.

Keywords
Inflation, Broad money, Economic growth, Ghana

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