Testing for asymmetry in monetary policy rule for small-open developing economies: Multiscale Bayesian quantile evidence from Ghana

Ghana’s consumer inflation has remained persistently high above its medium-term target despite officially practicing inflation targeting regime for over a decade. This paper examines how the Central Bank of Ghana has reacted to deviations of inflation and output gap from their respective desired levels over the past one and half decades. Primarily, it ascertains whether monetary policy in Ghana can be more precisely described by either (i) the standard linear Taylor rule, or (ii) an augmented linear rule including exchange rate or (iii) a nonlinear augmented threshold rule. The paper applies versions of frequentist and Bayesian quantile regressions at both time- and multiscale domains along with the standard threshold regression framework. The basic result is that the augmented nonlinear (threshold) Taylor rule describes the dynamics of interest rate settings in Ghana better than the linear rule. There is high degree of monetary policy inertia and an overriding aversion for rising inflation (above target). The authority shows greater tendency to react strongly to above-target inflation in the medium-to-longer term than in the short-term. We find that the Bank of Ghana is more aggressive toward inflation than output growth and does not react to the real economy independently from its concerns about inflation. The exchange rate has important influence on interest rate in the low inflation regime. We find an accommodative policy response to positive deviation of inflation from target even at the long run. Such policy passivity possibly underpins the persistently high inflation in Ghana as other policy interventions have not succeeded in taming inflation over the years.