Abstract:
E. OSEI-DWOMOH1 J. KOFI NKUAH² G. OSEI FORKUO³
Abstract: Formulating effective policy in developing economies requires a
deep understanding of the complex interplay between macroeconomic
variables and price levels. This study creates a detailed empirical model to
explain price-level movements in Ghana using key determinants like money
supply, fiscal balance, public debt, and exchange rate. Using quarterly time
series data from 1990 to 2023, the study employs Autoregressive Distributed
Lag (ARDL), Vector Error Correction (VECM), and Vector Autoregressive (VAR)
models to analyse short- and long-run relationships. The models confirm that
the exchange rate and money supply are primary drivers of price levels. The
ARDL model identified a significant long-run relationship, with an error
correction term (-0.47) suggesting that 47% of deviations from long-term
equilibrium are corrected quarterly. The VECM confirmed this long-run
stability, while Variance Decomposition analysis showed the exchange rate
and money supply account for over 60% of changes in the Consumer Price
Index (CPI) over a 10-period horizon. The findings highlight the critical need
for Ghanaian policymakers to manage currency fluctuations and money
growth to ensure price stability.
