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When is Inflation Harmful? Estimating the Threshold Effect for Ghana

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  • Joseph Magnus Frimpong
  • Eric Fosu Oteng-Abayie

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.

Suggested Citation

  • Joseph Magnus Frimpong & Eric Fosu Oteng-Abayie, 2010. "When is Inflation Harmful? Estimating the Threshold Effect for Ghana," American Journal of Economics and Business Administration, Science Publications, vol. 2(3), pages 232-239, September.
    • Handle: RePEc:abk:jajeba:ajebasp.2010.232.239
    DOI: 10.3844/ajebasp.2010.232.239
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    References listed on IDEAS

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    Cited by:

    1. Richard Ayisi, 2013. "Single-Digit Inflation Targeting and Economic Growth," American Journal of Economics and Business Administration, Science Publications, vol. 5(1), pages 22-28, September.
    2. Mavikela Nomahlubi & Mhaka Simba & Phiri Andrew, 2019. "The Inflation-Growth Relationship in SSA Inflation-Targeting Countries," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 64(2), pages 84-102, August.
    3. Singh Sarbjit & Singh Shiv Raj, 2010. "A Stock Dependent Economic Order Quantity Model for Perishable Items Under Inflationary Conditions," American Journal of Economics and Business Administration, Science Publications, vol. 2(3), pages 317-322, September.
    4. Prempeh, Kwadwo Boateng & Kyeremeh, Kwadwo & Peprah-Amankona, Godfred, 2022. "Does the Level of Inflation Matter in the Inflation-Growth Nexus in Ghana?," MPRA Paper 112738, University Library of Munich, Germany.
    5. Phiri, Andrew, 2013. "Inflation and Economic Growth in Zambia: A Threshold Autoregressive (TAR) Econometric Approach," MPRA Paper 52093, University Library of Munich, Germany.
    6. Nicas Yabu & Nicholaus J. Kessy, 2015. "Appropriate Threshold Level of Inflation for Economic Growth: Evidence from the Three Founding EAC Countries," Applied Economics and Finance, Redfame publishing, vol. 2(3), pages 127-144, August.
    7. repec:asi:ajoerj:2013:p:363-380 is not listed on IDEAS
    8. Daniel Agyapong & Anokye Mohammed Adam & Michael Asiamah, 2016. "Macroeconomic Behaviour and Economic Growth in Ghana," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(4), pages 26-42, October-D.

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