The Role of Energy Price Shocks in the Transmission of Monetary Policy in an Inflation Targeting Country: The Case of Ghana
Date
2022
Authors
Harvey, Simon K.
Walley, Bernard J.
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
Energy inflation has become more volatile and has evolved independently of other
components of headline inflation over the years. Therefore, the use of one Phillips
curve to capture short-run inflation dynamics may be inadequate in terms of helping
the monetary policy authorities to determine the appropriate path of the monetary
policy rate. In particular, such an approach may introduce noise into the model system,
making it difficult to get reliable forecasts for inflation. We extend the existing New Keynesian model to include separate Phillips curves for energy inflation and non energy inflation. This approach would help the monetary policy authority in Ghana to
gain a deeper understanding of how shocks to energy prices affect inflation, thereby
leading to informed decisions about the appropriate path of the monetary policy rate
in Ghana. We also incorporate a fiscal block to capture the effects of fiscal deficits on
inflation in Ghana. We use the extended model to study the transmission mechanisms
of the real economy, and of the exchange rate. This analysis allows us to understand
the importance of these shocks in explaining inflation developments in Ghana and
their implications for monetary policy. The results are mixed, indicating that isolating
energy price from the rest of prices in the CPI basket does not necessarily improve
the forecasts of the key macroeconomic variables, and will therefore not necessarily
lead to better policy outcomes.
Description
Keywords
Monetary Policy, Inflation Targeting, Energy Prices