An Econometric Analysis of the Impact of Inflation on Economic Growth

This study investigates the relationship that exists between inflation and economic growth and examines inflation threshold beyond which inflation impacts negatively on growth using Ghanaian annual time series from 1965-2007. The empirical analysis for inflation-growth relationship is done using the bounds testing approach to cointegration, which is based on Autoregressive Distributed Lag (ARDL) procedure developed by Pesaran et al. (2001). The cointegration test identifies a long run relationship between economic growth and its determinants including inflation. The empirical findings from this study reveal that, in the short-run, there is a highly significant inverse correlation between inflation and economic growth. However, the long-run relationship between the two macroeconomic variables is weak. Following the seminal methodology of Khan and Senhadji (2001), the inflation threshold level of 11% is robustly estimated. The results reveal that if inflation increases beyond the 11 percent threshold level, economic growth in Ghana would approximately decline by 0.023 percent.