REGRESSION AND TIME SERIES ANALYSIS ON RATE OF INFLATION AND BANK CHARGES IN GHANA

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2/18/2013 10:30:53 AM -

The use of interest rate as a policy instrument for the control of inflation has become a central feature of macroeconomic policy in many countries over the past two decades. Until recently it had appeared to be relatively successful in that inflation in most industrialized countries has been low, though there are clearly alternative explanations for this low inflation such as the downward pressure of prices coming from the growth of low cost production in a number of industrialized countries and an absence until recently of rising commodity prices (Arestis et al, 2008a).

In addition to the above, inflation rate has been politically debated in Ghana by the two strong political parties namely the New Patriotic Party (NPP) and the National Democratic Congress (NDC) over the years. Both the NDC and the NPP are claiming that it was during their regime that the inflation rate started falling. In order to resolve this argument, the Chao Test was conducted to test whether there was any structural change in the inflation rate during the regimes of the two parties.

The objectives of the study were to identify the trend in inflation and the prime rate in Ghana using Time Series and Regression Analysis and to perform a Chow test to find out whether there were structural changes in the models during the period under study. It was also to verify the direction or causality of the prime rate and inflation rate. This was based on secondary source of data.

It was found from the study that when prime rate or interest rate is zero, deflation will set in. In addition, when there is an increase in the MPR, inflation rate will increase by 0.88. This figure however conforms to what was initiated by the theoretical works of Fischer (1975), Merton (1975) and Malliaris and Malliaris (1991), which argues that there is a positive relationship between inflation uncertainty and real interest rates. Also, about 46.4% of the total variation in inflation rate can be explained by the MPR. Though there exist some similarities in the correlation figure depicted by this data to that initiated by the theoretical works of Fischer (1975), Merton (1975) and Malliaris and Malliaris (1991), there are some variations. This is because, according to Fisher (1930) nominal interest rates respond one-to-one to expected inflation. In detail, Fisher (1930) obtained correlation coefficients of 0.98 and 0.857 for Great Britain and the United States, when price changes were spread over 28 years and 20 years respectively. This difference might be because of the type of data, location, the method and year interval used. Meanwhile, there are other factors left to make the model complete since MPR covered only 46.4%. In addition, the Chow test indicated that there were structural changes in the inflation figures during both parties' regimes. This therefore indicates that the full time series model is not appropriate for the data. This indeed shows that there were some changes in the monetary policies during both parties regime that caused these structural changes.

Based on the findings of this study, Government, through the Ministry of Finance & Economic Planning and its allied institutions, should work hard to ensure economic stability to impact positively on the country's economy. Economic handlers should also continue to manage and bring down inflation to single digit as exits now, since rapid development generally occurs when inflation is low. It is anticipated that once inflation is low, there should be normalization of the prices of goods and services which will automatically reduce the high cost of doing business and also lessen the financial burdens of the people. The central bank could act as the 'insurer of bankers' and provide a facility that will cap the maximum increases in the rates to help check the situation. It could also promote the use of prime rate to index contracts, cost, business debt and planned expenditure to make the prime rate more relevant.

For more details Contact:
SAMUEL KWAKU OBENG
(MANAGING DIRECTOR)
SAMVEN'S RESEARCH AND CONSULTANCY UNIT LIMITED
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