Monetary policy transmission in Ghana: an empirical investigation of the interest rate channel

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JUNE, 2016.
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The study set out to examine monetary policy transmission in Ghana for the period 1970-2013, specifically considering the interest rate channel. Deposit interest, lending interest, and Treasury bill rates were the interest rate measures used in this study. Monetary policy rate was measured by the prime rate. Trend analyses conducted indicate all variables were generally fluctuating in their levels but mean reverting in their first differences. The Philip-Perron (PP) method was adopted to examine the stationarity properties of the variables used for the study. All the variables were first difference stationary and hence, integrated of order 1. The unit root results learnt support to the adoption of the Johansen Maximum Likelihood cointegration technique to investigate the existence of cointegrating relationships between the variables. The results indicated no cointegrating relationship between deposit interest rate and monetary policy rate, as well as lending interest rate and monetary policy rate. However, there was cointegrating relationship between Treasury bill rate and monetary policy rate. Based on the cointegration results, the vector autoregressive(VAR) framework was employed to analyze the short-run relationship between deposit and lending rates and monetary policy rate. The VAR results implied incomplete transmission from monetary policy rate to deposit, as well as lending interest rates. In the case of the Treasury bill rate, the vector error correction model ( VECM) as well as the fully modified ordinary least square (FMOLS) were used to measure its relationship with monetary policy rate. The long-run results showed over complete transmission while the short-run results indicated incomplete transmission.
A thesis submitted to the Department of Economics, College of Humanities and Social Sciences in partial fulfilment of the requirements for the degree of Master of Science in Economics.