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Essays in inflation and monetary dynamics in developing countries

Simon Kwadzogah Harvey, University of Nebraska - Lincoln

Abstract

This dissertation is consists of three essays. In the first essay, I analyze how the information contained in the disaggregate components of aggregate inflation helps improve the forecasts of the aggregate series using inflation data from Ghana. Direct univariate forecasting of the aggregate inflation data by an autoregressive (AR) model is used as the benchmark with which all autoregressive (AR), moving average (MA) and vector autoregressive (VAR) models of the disaggregates are compared. The results show that directly forecasting the aggregate series from the benchmark model is generally superior to aggregating forecasts from the disaggregate components. Additionally, including information from the disaggregates in the aggregate model rather than aggregating forecasts from the disaggregates performs best in all forecast horizons when appropriate disaggregates are used. The implication of these results is that better inflation forecasts for Ghana are produce by using information from relevant disaggregates in the aggregate model rather than direct forecasts of the aggregate or aggregating forecasts from the disaggregates. ^ In the second essay, I use a structural vector autoregression (SVAR) to model inflation so as to identify the relative importance of shocks to real output growth, monetary growth and exchange rate depreciation in inflation dynamics in Ghana. The results show that neither monetary growth alone nor structural factors alone explain the inflation experience in Ghana and that the structural factors dominate monetary growth in the inflation dynamics. There is a fairly strong feedback between inflation and exchange rate depreciation both of which have weak relationship with monetary growth. These suggest that policies that boost domestic supply and therefore reduce import demand will be more potent than direct monetary management to curb inflation in Ghana. ^ Finally, in the third essay, I the test whether the West African Monetary Zone (WAMZ) is a common currency area by using a vector autoregressive model to study the variance decomposition, impulse responses of key economic variables and linear dependence of the underlying structural shocks of the countries in the zone. The variance decomposition shows that the zone a whole does not have common sources of shock, which is expected because of the diverse economic structures of these countries. The correlation of the structural shocks also shows that these countries respond asymmetrically to common supply, demand and monetary shocks and will therefore respond differently to a common monetary policy. It is therefore not in the interest of the individual countries to go into a monetary union now or in the near future unless the economies of these countries converge further.^

Subject Area

African Studies|Economics, General

Recommended Citation

Harvey, Simon Kwadzogah, "Essays in inflation and monetary dynamics in developing countries" (2012). ETD collection for University of Nebraska - Lincoln. AAI3521490.
http://digitalcommons.unl.edu/dissertations/AAI3521490

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