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Is the Monetary Policy Rate Effective? Recent Evidence from Ghana

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  • Nana Kwame Akosah

    (Bank of Ghana)

Abstract

We examine the effectiveness of monetary policy transmission mechanism in Ghana using several of statistical and econometric techniques for the period 2002M1 – 2014M12. We find monetary policy rate (MPR) to be quite effective in signaling the money market interest rates in both the short run and long run, as the effect is incomplete (that is, not one-to-one). In addition, a hierarchy of short-term money market rates in Ghana is identified as follows: Monetary Policy Rate, Treasury bill rate, Interbank rate and retail rates (preferably, lending rate), accentuating the large role played by Treasury bill interest rate in the interest rate transmission channel in Ghana. Essentially, monetary authority responds positively and contemporaneously to output and inflationary pressures. Inflation is mostly driven by interest rate shock over the medium to long term, pointing to an impact of monetary policy. In the short term, however, exchange rate shock has relatively larger influence on inflation than that emanating from interest rate. In contrast, output is largely driven by credit and assets prices shocks. This suggests that agents’ knowledge about future output prospects are immediately reflected in assets prices before impacting on output. The paper therefore supports policies that would promote strong financial and macroeconomic stability to help inure effective monetary policy transmission in Ghana.

Suggested Citation

  • Nana Kwame Akosah, 2015. "Is the Monetary Policy Rate Effective? Recent Evidence from Ghana," IHEID Working Papers 14-2015, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp14-2015
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    References listed on IDEAS

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    7. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 91, European Central Bank.
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    Cited by:

    1. Akosah, Nana Kwame & Alagidede, Imhotep Paul & Schaling, Eric, 2020. "Testing for asymmetry in monetary policy rule for small-open developing economies: Multiscale Bayesian quantile evidence from Ghana," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    2. Jackson, Emerson Abraham & Barrie, Mohamed Samba & Tamuke, Edmund, 2023. "Effectiveness of the Interest Rate Channel of Monetary Policy Transmission Mechanism in Sierra Leone," MPRA Paper 117478, University Library of Munich, Germany, revised 06 May 2023.
    3. Akosah, Nana & Alagidede, Imhotep & Schaling, Eric, 2019. "Unfolding the monetary policy rule in Ghana: quantile-based evidence within time-frequency framework," MPRA Paper 103260, University Library of Munich, Germany, revised 01 Oct 2020.
    4. Binning, Andrew & Bjørnland, Hilde C. & Maih, Junior, 2019. "Is monetary policy always effective? Incomplete interest rate pass-through in a DSGE model," Working Paper 2019/22, Norges Bank.
    5. Nana Kwame Akosah & Imhotep Paul Alagidede & Eric Schaling, 2021. "Dynamics of Money Market Interest Rates in Ghana: Time‐Frequency Analysis of Volatility Spillovers," South African Journal of Economics, Economic Society of South Africa, vol. 89(4), pages 555-589, December.
    6. Ferdinand Ahiakpor & William Cantah & William Brafu-Insaidoo & Eric Bondzie, 2019. "Trade Openness and Monetary Policy in Ghana," International Economic Journal, Taylor & Francis Journals, vol. 33(2), pages 332-349, April.

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    More about this item

    Keywords

    Monetary Policy; Inflation Targeting; Transmission Mechanism; Structural Shocks.;
    All these keywords.

    JEL classification:

    • 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

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