Dynamics of Inflation and Financial Development: Empirical Evidence from Ghana

Abstract

The study examines the dynamic link between inflation and financial development in Ghana using annual time series from 1964-2012. Specifically, the paper assessed whether the direction of causality between the two differs in the short and long run. In the short run, the paper established a dual negative relationship between the two, while a unidirectional negative effect of inflation on financial development was detected in the long run using sequence of econometric techniques. Inflationary effect was much stronger on Private Credit/GDP than on M2/GDP, while the dampening effect of financial development on inflation largely originated from Private Credit/GDP.

Keywords: Inflation, Financial Development, Deepening, Intermediation, Bivariate, Multivariate, Correlation Analysis, Engel-Granger Causality, Vector Error Correction, Vector Autoregression Models, Variance Decomposition, Impulse Response and Ghana.

*Disclaimer: This Working Paper should not be reported as representing the views of Bank of Ghana. The opinions expressed in this working paper reflect those of the author and do not represent those of the Central Bank.