Inflation Determinants - Milton Friedman’s Theory and the Evidence from Ghana, 1965-2012 (Using ARDL Framework)

Abstract

This paper sets out to explore the Monetarists’ Theory on inflation determinants, by applying the popular Autoregressive Distributed Lag (ARDL) Framework to help investigate the long-run relationship and the short-run dynamics in the model; using Time Series Data from World Bank, (WDI,2017), spanning from 1965-2012 on Ghana’s economy. The findings from this paper gives much credence to Monetarism. The study revealed a strong positive and statistically significant relationship between inflation pressures and the money growth in the economy both in the short-run and long-run periods. The ECM coefficient revealed that about 99% of the deviations from long-run equilibrium path, arising from short-run monetary shocks, is restored within one year period, indicating a very high speed of equilibrium adjustment process. It is therefore recommended that deliberate monetary policy framework be designed, critically targeting the growth rate of money supply in the economy, and this will have a strong positive and significant impact on inflationary pressures for growth and stability in the national economy.