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

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  • Younger, Stephen D

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.

Suggested Citation

  • Younger, Stephen D, 1992. "Testing the Link between Devaluation and Inflation: Time Series Evidence from Ghana," Journal of African Economies, Centre for the Study of African Economies, vol. 1(3), pages 369-394, November.
    • Handle: RePEc:oup:jafrec:v:1:y:1992:i:3:p:369-94
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    Cited by:

    1. Amjad Ali & Nooreen Mujahid & Yahya Rashid & Muhammad Shahbaz, 2015. "Human Capital Outflow and Economic Misery: Fresh Evidence for Pakistan," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 124(3), pages 747-764, December.
    2. Ernest Aryeetey & Christopher Udry, 2000. "Saving in Sub-Saharan Africa," CID Working Papers 38A, Center for International Development at Harvard University.
    3. Philip Kofi Adom & William Bekoe & George Quartey & Kwaku Amakye & Charles Barnor, 2016. "Impact of Market-based Policies and External Fiscal Discipline on Ghana's Inflation," Review of Development Economics, Wiley Blackwell, vol. 20(4), pages 794-816, November.
    4. Ghura, Dhaneshwar, 1995. "Effects of macroeconomic policies on income growth, inflation, and output growth in Sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 17(4), pages 367-395, August.
    5. Maozu Lu & Zhichao Zhang, 2003. "Exchange rate reform and its inflationary consequences: an empirical analysis for China," Applied Economics, Taylor & Francis Journals, vol. 35(2), pages 189-199.
    6. Alderman, Harold & Shively, Gerald, 1996. "Economic reform and food prices: Evidence from markets in Ghana," World Development, Elsevier, vol. 24(3), pages 521-534, March.

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