Faculty Research and Creative Activity

Prices and Monetary Policy in Ghana: A Case of Two Policy Instruments

Document Type

Article

Publication Date

10-10-2014

Abstract

The primary objective of this study involves evaluating the link between monetary policy, price levels, and the bilateral real exchange rate in Ghana by delineating between different monetary policy instruments. Using monthly data from 1992-2013, a Vector Error Correction Model (VECM) is developed for exploring and measuring the relationship between monetary policy, inflation rate, and the bilateral real exchange rate in Ghana. The growth of broad money supply (M2) and the Monetary Policy Rate are used as the principal monetary policy instruments. Changes in the world commodity price index acts as an exogenous supply shock. Using this framework enables the comparison of existing literature to current research and assists in determining which monetary policy tool is more influential in general price stabilization in Ghana. Results suggest that both financial market quantities and financial market prices have an effect on inflation and real exchange rate in Ghana. However, the Monetary Policy Rate has a larger impact on macroeconomic variables than the growth of money supply. Supply shocks were found to have minimal effects on general prices in Ghana.

https://works.bepress.com/teshome_abebe/4

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