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Testing the Link between Devaluation and Inflation: Time Series Evidence from Ghana

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Author Info
Younger, Stephen D

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Abstract

Policy makers in Africa often argue that devaluation leads to inflation. This is undesirable in itself and also because the inflation mitigates any impact that the nominal devaluation has on the real exchange rate, which is what one hopes to change in the face of balance of payments problems. This paper argues that, under the extensive trade and exchange restrictions that are common in Africa, devaluation of the official exchange rate should have little impact on domestic prices. It tests that hypothesis with time series techniques due to Box and Tsiao (1975) using data from Ghana for the period 1974-86 when exchange controls were severe. The paper's main conclusion is that devaluations in Ghana have had a small but statistically significant impact on the domestic CPI: for a 100 percent increase in the exchange rate, prices rise by 5 to 10 percent. Copyright 1992 by Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Journal of African Economies.

Volume (Year): 1 (1992)
Issue (Month): 3 (November)
Pages: 369-94
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Handle: RePEc:oup:jafrec:v:1:y:1992:i:3:p:369-94

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  1. Ernest Aryeetey & Christopher Udry, 2000. "Saving in Sub-Saharan Africa," CID Working Papers 38, Center for International Development at Harvard University. [Downloadable!]
  2. Maozu Lu & Zhichao Zhang, 2003. "Exchange rate reform and its inflationary consequences: an empirical analysis for China," Applied Economics, Taylor and Francis Journals, vol. 35(2), pages 189-199, January. [Downloadable!] (restricted)
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