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The Effect of Price Stability on Real Sector Performance in Ghana

The Effect of Price Stability on Real Sector Performance in Ghana

Paper No. RP_228 | By Peter Quartey | January 2011 | English
Monetary policy in Ghana has, over the years, focused on ensuring price stability or low inflation. The aim of the price stability policy is to provide a stable environment for real sector activities to flourish. However, the outcome of the policy on real sector activities has not been subjected to any empirical investigation and this forms the focus of this study. The study, specifically, examines how the policy of price stability, pursued by the Bank of Ghana, has affected real sector performance. It also examines the revenue and "growth maximizing" rate of inflation for Ghana using data from Bank of Ghana as well as from World Development Indicators (WDI). Subsequently, the relationship between inflation thresholds and real sector performance is examined. This is complemented with bimonthly data to discuss the trends in business confidence during the recent price stability regime. The study finds that economic performance is higher under low inflation periods than when inflation is high. It also establishes the existence of threshold effects of inflation on economic growth.

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