TITLE:
Exponential GARCH Modelling of the Inflation-Inflation Uncertainty Relationship for Ghana
AUTHORS:
Alfred Barimah
KEYWORDS:
Inflation Uncertainty, EGARCH, Friedman-Ball Hypothesis, Cukierman-Meltzer Hypothesis
JOURNAL NAME:
Modern Economy,
Vol.5 No.5,
May
20,
2014
ABSTRACT: This study examines the asymmetric effects of inflation on inflation
uncertainty in Ghana for the period 1963:4 to 2014:2. Exponential Generalized
Autoregressive Heteroscedasticity (EGARCH) model is employed on monthly
inflation rates to estimate inflation uncertainty. Two complementary approaches
are used to determine the empirical relationship between inflation and its
uncertainty. In the first approach, inflation dummy is included in the variance
equation and in the second, we employ the two-step procedure in which Granger
causality test is performed on the monthly inflation rates and the conditional
variance generated from the EGARCH model. We find strong support for both
Friedman-Ball and Cukierman-Meltzer hypotheses for the full sample as well as
the inflation targeting period. Given the current build-up in inflationary
pressures in Ghana, our results warn of possible costs of not keeping inflation
in check. The major policy implication that follows from this study is that the
Bank of Ghana should strive to minimize the gap between actual and target
inflation levels so the public will have consistent belief in all announced
policy targets.