A Cointegration analysis of inflation and interest rate volatility in Ghana.

Abstract

The relationship between inflation and interest rate is of interest to many economy planners. The objective of this paper is to establish the relationship between interest rate and inflation in Ghana. Using monthly data for the period January 2003 to December 2013, this paper employ time series techniques, namely unit root tests, cointegration test and Granger causality to the data. The unit root test showed that both interest rate and inflation are non-stationary at the levels of the process but stationary at first difference. Again, the cointegration analysis revealed that there is exist cointegration among inflation and interest rate for the period under study and that interest rate causes inflation but the converse is not true. The paper recommends that managers of the Ghanaian economy should focus more on regulating the conduct of commercial banks in terms of managing the interest rates commercial banks set since it has be found that the interest rate drives inflation more than inflation driving interest rate