MONETARY POLICY, INFLATION STABILISATION AND OUTPUT GROWTH IN GHANA, 1980-2017
Date
2022-01-19
Authors
ABDULAI, IBRAHIM
Journal Title
Journal ISSN
Volume Title
Publisher
University of Ibadan
Abstract
Monetary policy is central to the attainment of low and stable inflation, and long-term
growth. Ghana’s inflation has been relatively high and volatile since 1980 with modest
economic growth. Inflation averaged 37.3% and 15.4% annually in 1980-2000 and 2001-
2017, respectively. Real Gross Domestic Product (RGDP) grew at 3.2% and 6.2% in the
same periods. While various monetary policy strategies had been implemented to stabilise
inflation and stimulate growth, the extent to which monetary policy had affected inflation
and output has been under-studied. The study, therefore, examined the role of monetary
policy in inflation stabilisation and output growth in Ghana from 1980 to 2017.
The New Neoclassical Synthesis which emphasises interest rate as a major tool for
controlling inflation and output growth was adopted. Three econometric models, namely
Fractional Cointegration Vector Autoregression (FCVAR), Nonlinear Autoregressive
Distributed Lag (NARDL) and Structural Vector Autoregression (SVAR) were estimated.
The FCVAR was used to determine the stabilisation role of monetary policy by examining
the short and long-memory properties of inflation and RGDP growth; and the NARDL
model was used to examine the long-run (a)symmetry impact of monetary policy on RGDP
growth. The SVAR model was employed to determine the impulse response functions
taking into consideration the structural monetary transmission mechanisms. The period
considered included 1980-2001 when monetary policy targeted monetary aggregates and
inflation-targeting (IT) regime (2002-2017) which used Monetary Policy Rate (MPR) as a
stabilising instrument. The variables employed were exchange rate, inflation, MPR, money
growth and RGDP growth. Quarterly data were collected from Bank of Ghana’s Annual
Reports and Ghana Statistical Service’s Bulletins. The estimates were evaluated at
a
0.05.
The magnitude of the fractional parameters for MPR was 1.24 and 0.79 for money growth.
This implies that it took a shorter period for monetary policy to contain inflation and ensure
RGDP growth under IT, compared to targeting monetary aggregates. There was a significant
negative relationship between MPR and inflation (-0.61), suggesting that an increase in
MPR dampened inflation. The impact of MPR on RGDP growth was symmetric (t = -
0.0294), as a percentage change in MPR exerted a proportionate effect on RGDP growth.
However, the relationship between money growth and RGDP growth was asymmetric (t =
-2.3053). A one-standard-deviation shock from MPR increased inflation up to the fourth
quarter, while RGDP growth declined in response to the same shock. Shocks from growth
in RGDP, money and MPR contributed 9.31%, 3.25% and 7.36%, respectively to the
variation in inflation. Inflation was persistent because it retained 43% of self-shock,
indicative of a relatively high inflation inertia. A significant variation in MPR (33.37%) is
attributable to inflation shock, implying that the monetary authority responded quickly to
deviation of inflation from target.
Monetary policy rate had a better stabilisation effect on inflation and a greater impact on
output growth than monetary aggregates in Ghana from 1980 to 2017. The use of monetary
policy rate should be sustained, while improving its effectiveness through continuous
financial sector reforms.
Description
Keywords
IInflation stabilisation in Ghana,. , Output growth, , Inflation-targeting, , Monetary policy rate, , Monetary aggregates