Monetary Aggregates Targeting, Inflation Targeting and Inflation Stabilization in Ghana

Abstract

The central bank of Ghana (BoG) has operated monetary aggregates targeting and inflation targeting since the 1980s, to ensure enhanced output growth, low unemployment and stable, low inflation. Under inflation targeting, the inflation rate averaged 13.26 per cent per annum between 2007 and 2015, compared with 29.22 per cent per annum under monetary aggregates targeting. The relatively lower inflation rates notwithstanding, an average inflation rate of 13.2 per cent per annum is far above the medium-term target of 8 per cent. This paper has examined the effectiveness of monetary aggregates targeting and inflation targeting in keeping inflation at moderate levels. The autoregressive distributed lag (ARDL) model was applied to the data covering the period 1970-2015. The results show that monetary targeting has steered inflation to moderate levels only in the short run while inflation targeting has maintained low inflation rates in both short run and long run. But neither regime has kept inflation at stable levels and within the target band, due to the sluggish transmission of broad money supply and prime rate changes to inflation. We implore the monetary authorities to strengthen the institutional setup for steering short-term interest rates in Ghana. They should also enhance the BoG Act 2002 (Act 612), to develop secondary anchors and rules around output, money supply and fiscal deficit. Finally, the monetary policy committee should monetary policy credibility and transparency through strengthening its communication framework.

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