  This paper scrutinizes the rationale for the adoption of inflation targeting
(IT) by Bank of Ghana in 2002. In this case, we determine the stability or
otherwise of the relationship between money supply and inflation in Ghana over
the period 1970M1-2016M3 using battery of econometric methods. The empirical
results show an unstable link between inflation and monetary growth in Ghana,
while the final state coefficient of inflation elasticity to money growth is
positive but statistically insignificant. We find that inflation elasticity to
monetary growth has continued to decline since the 1970s, showing a waning
impact of money growth on inflation in Ghana. Notably, there is also evidence
of negative inflation elasticity to monetary growth between 2001 and 2004,
lending support to the adoption of IT framework in Ghana in 2002. We emphasized
that the unprecedented 31-months of single-digit inflation (June 2010-December
2012), despite the observed inflationary shocks in 2010 and 2012, reinforces
the immense contribution of the IT framework in anchoring inflation
expectations, with better inflation outcomes and inflation variability in
Ghana. The paper therefore recommends the continuous pursuance and
strengthening of the IT framework in Ghana, as it embodies a more eclectic
approach to policy formulation and implementation.
