The Relevance of Monetary Policy in Stabilising Prices and Output Levels in Ghana: The Impact of Monetary Policy on Price Stability and Output Levels in Ghana

Abstract

This study has reviewed recent monetary and financial policies pursued in Ghana. The paper concludes that generally, while there have been remarkable improvements in the key monetary indicators which suggest relatively effective monetary policies during the period under review, the fiscal imbalance in the country has limited these outcomes. There is clearly the need for greater fiscal discipline given that monetary policies cannot achieve their intended purposes in the presence of fiscal imbalances. Moreover, although the policy rates have signaled a downward trend in lending rates, this has not reflected in the lending rates charged by deposit money banks (DMBs). This suggests that there are other factors driving interest rates in the country and therefore the need for policy intervention to make the cost of doing business favorable to the private sector.Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability. Based on countries’ experience on the role of monetary policy in controlling economics instability, this study examines the efficacy of monetary policy in controlling inflation rate and exchange rate instability. The analysis performed is based on a rational expectation framework that incorporates the fiscal role of exchange rate. Using quarterly data spanning over 1980: 1 to 2000: 4, and applying time series test on the data used, the paper shows that the effort of monetary policy at influencing the finance of government fiscal deficit through the determination of the inflation tax rate affects both the rate of inflation and the real exchange rate, thereby causing volatility in their rates.The study employed correlational research design. The study used time series empirical data on the variables to describe and examine the effectiveness of monetary policy tools in countering inflation in Ghana by establishing correlation coefficients between the inflation and the monetary policy tools. The study used secondary data on the Consumer Price Index for inflation, 91-day Treasury bill rate, exchange rate, money supply (M3) and repo rate. The analyses entailed the computation of the various coefficients of correlation denoted as ‘β’ in the model to determine the effectiveness of monetary policy tools in countering inflation in Ghana.