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CHOICE OF MONETARY POLICY REGIME IN GHANA
Abstract
Monetary aggregate targeting as a major monetary policy tool, is principally based on a stable and predictable relationship between inflation and monetary aggregate(s). However, structural changes in the economy generally and the financial sector in particular (with financial innovation and increasing application of technology) have significantly weakened the relationship between inflation and money. This paper reviews issues associated with the choice of the current policy framework in Ghana, in particular, focusing on the factors associated with the choice and also the practical aspects of implementation as well as its effects on the performance of inflation and output and on the trade-off between inflation and output variability.
The paper finds support for the current framework both on institutional and technical grounds and that the practical aspects of implementation of inflation targeting in Ghana remain similar to those of other inflation targeting countries. Some differences however exist, notable among which is the publishing of forecasts to help anchor inflation expectations.
The new regime has set inflation on a downward path even though meeting the announced inflation targets has proved elusive. The new policy regime enhanced the transparency of the monetary policy process, improved the communication strategy of the Bank with the public and thus helped anchored inflation expectations. There has also been an increased convergence towards the inflation targets with significantly reduced volatility in not only inflation, but also real economic variables such as real GDP growth underpinned perhaps by improved credibility with the new regime. Indeed and most strikingly, is the finding that the MPC’s policy rate decisions showed a higher weight for output stabilization compared to deviations of estimated inflation from its target. This perhaps, partly explains the sustained growth witnessed in the Ghanaian economy in recent times though inflation also significantly converged towards the targets.
Keywords: Money demand, Inflation, Inflation targeting, monetary policy.