Causal linkages among money growth, inflation and interest rates in Ghana

Abstract

Abstract. This study instigates the causal linkages among money growth, inflation and interest rate in Ghana. The essence of ensuring price stability, a considerable increase in money growth that enhances economic growth and development and favorable rate of interest that encourage domestic business and foreign direct investment cannot be over emphasized. The data was extracted from two main sources. The main variable under study were money supply, interest rate and inflation rate. Other variables that affect inflation rate such as exchange rate, real gross domestic product were controlled for. Data on money supply, interest rate and exchange rate were extracted from world development indicator (WDI) whereas data on inflation and the GDP growth were extracted from annual report of the Central Bank. The data comprises of missed order of cointegration. That is I (0) and I(1). So bounds test of cointegration proposed by Pesaran, Shin & Smith (2001) was used. It was found out that money growth has both short run and long run relationship with inflation and all the other variables are insignificant in influencing inflation. The Granger causality test was conducted to help find the causality among the variables of interest. The null hypothesis that inflation rate does not does not Granger cause money growth was rejected at 5% which implies that there is a uni-directional causality between inflation and money growth. It was recommended that, in an attempt of reducing inflation both in the long run and short run, increase in money supply should be reasonable.

Keywords. Money growth, Inflation, Interest rate.

JEL. B26, D53, E44, G10, G34.