Testing the Link between Devaluation and Inflation: Time Series Evidence from Ghana

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Periodical article

Title:	Testing the Link between Devaluation and Inflation: Time Series Evidence from Ghana
Author:	Younger, Stephen D.
Year:	1992
Periodical:	Journal of African Economies
Volume:	1
Issue:	3
Period:	November
Pages:	369-394
Language:	English
Geographic term:	Ghana
Subjects:	inflation devaluation Economics and Trade
External link:	https://jae.oxfordjournals.org/content/1/3/369.full.pdf
Abstract:	Policymakers in Africa often argue that devaluation leads to inflation. This is undesirable in itself and also because the inflation mitigates any impact that the nominal devaluation has on the real exchange rate, which is what one hopes to change in the face of balance of payments problems. This paper argues that, under the extensive trade and exchange restrictions that are common in Africa, devaluation of the official exchange rate should have little impact on domestic prices. It tests that hypothesis with time series techniques developed by G.E.P. Box and G.C. Tiao (1975), using data from Ghana for the period 1974-1986 when exchange controls were severe. The paper's main conclusion is that devaluations in Ghana have had a small but statistically significant impact on domestic consumer prices: for a 100 percent increase in the exchange rate, prices rise by 5 to 10 percent. This implies that African governments with highly overvalued exchange rates and controlled trade regimes probably have significant scope for using devaluation to redistribute importers' rents. Bibliogr., notes, ref., sum.