MACROECONOMIC DETERMINANTS OF INFLATION IN GHANA: AN EMPIRICAL ANALYSIS

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.