MONETARY POLICY, INFLATION STABILISATION AND OUTPUT GROWTH IN GHANA, 1980-2017

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 consideredincluded 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 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.