Economic Growth Implications of Inflation Targeting and Inflation Volatility: An Emerging Economy’s Perspective

Abstract

Purpose: The purpose of this study was to comparatively examine the extent to which inflation targeting and inflation volatility impact on economic growth from an emerging economy’s perspective. Methodology: Annual data from the World Development Indicator (WDI) and the Bank of Ghana (BoG) from 1985 to 2014 were used for the study. The data was interpolated into quarterly series using E-views. The stationarity characteristics of the variables were tested using the Augmented Dickey-Fuller and the Phillip-Perron unit root tests. The GARCH (1 1) and ARDL models were employed for the analysis. Findings: The study found that inflation targeting had a positive significant effect on economic growth in Ghana. Also, despite the volatile nature of inflation in Ghana, inflation volatility had no significant effect on economic growth. Implications: This scholarly work would aid policy makers in policy formulation pertaining to inflation targeting and inflation volatility on economic growth. It will also open up the circles of knowledge regarding inflation targeting monetary policy’s regime in empirical literature, institutions of higher learning and the understanding of the general public. The study recommends that the Bank of Ghana maintains its current monetary policy framework - Inflation Targeting, but should strengthen the preconditions and subsequent requirements of the monetary policy in order to maximize the gains to economic growth.