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General Equilibrium Model for Monetary Policy Responses to Macroeconomic Instabilities in Developing Economy: A Ghanaian Perspective

Author

Listed:
  • Nana Kwame Akosah
  • Imhotep Paul Alagidede
  • Eric Schaling

Abstract

The study develops a standard New Keynesian model to examine how monetary authority reacts to both domestic and external shocks as well as how its policy decision impacts the general macroeconomy in developing African economy. Using Bayesian estimation techniques and a Ghanaian dataset, the article also seeks to determine the best-suited monetary policy rule for Ghana and countries with similar characteristics. The basic finding is that a forward-looking Taylor rule—where authority reacts to one-period-ahead inflation deviation from target alongside the current output gap—is the most appropriate monetary policy rule for Ghana. Another salient finding is that variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. In addition, the dominant determinants of inflation are exchange rate risk premium and price markup shocks. Collectively, the article also unveils that monetary policy responses to macroeconomic shocks are broadly in line with conventional economic theory. There is also conspicuous evidence that the general equilibrium model with representative consumers is practically suitable for monetary policy analysis in Ghana, as contractionary monetary policy impulse is able to contemporaneously induce disinflation and output contraction. Given the strong evidence of a large segment of the unbanked population in Ghana, the findings in this study could be verified based on a model that allows for the co-existence of optimizing and non-optimizing consumers. JEL Classification: B41, C5, C11, D11, D21, D41, D42, E2, E12, E43, E52, E58, F31, F41

Suggested Citation

  • Nana Kwame Akosah & Imhotep Paul Alagidede & Eric Schaling, 2024. "General Equilibrium Model for Monetary Policy Responses to Macroeconomic Instabilities in Developing Economy: A Ghanaian Perspective," South Asian Journal of Macroeconomics and Public Finance, , vol. 13(2), pages 213-272, December.
    • Handle: RePEc:sae:smppub:v:13:y:2024:i:2:p:213-272
    DOI: 10.1177/22779787241253638
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    More about this item

    Keywords

    Monetary policy; New Keynesian model; Bayesian estimation; marginal likelihood; Metropolis–Hastings; Ghana;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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