An empirical investigation into the effect of monetary policy on inflation in Ghana

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September, 2016
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This study investigated the effect of monetary policy on inflation in Ghana using a modeling technique of the Autoregressive Distributed Lagged Model (ARDL) over a period of 1980 to 2014. The monetary variables considered for the study include , , and monetary policy rate. Furthermore, interest rate and exchange rate were also included. The stationarity test results showed a mix order of integration among the variables understudy. Hence offering support for the use of the bounds test approach to cointegration. The study finds a stable long-run relationship amongst the variables and also finds evidence of long-run and short-run dynamics. The results show that there’s a statistically significant positive short-run and long-run relationship between money supply and inflation in this study. An expected statistically significant negative relationship between monetary policy rate and inflation according to conventional banking practice was confirmed. Furthermore, this study revealed a statistically significant positive relationship between inflation and interest rate in Ghana in both the long-and short-run. Economic growth was also found to have a negative impact on inflation in the long-run. An expected positive relationship between government expenditure and inflation in both short-run and long-run was revealed. Trade openness has a negative impact on inflation in the long-run and short-run.The study recommends that immediate measures need to be adopted by the Central Bank to reduce money supply. Thus, Bank of Ghana should sell more government securities in order to reduce the total amount of money in the economy. However, this will be more effective if the size of the securities market is large. Hence, more financial institutions and non-financial institutions should be motivated in participating in the activities of government securities. Fiscal discipline is also required to reduce excess money supply emanated from large scale financial deficit.
A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirements for the Award of Master Degree of Science in Economics.