Financial Development, Public Debt And Monetary Policy Effectiveness In Ghana

Abstract

This study examines the relationship among financial development, public debt dynamics, commercial banks’ responsiveness and monetary policy effectiveness in Ghana. The objectives (1) examined the role of financial development in the effectiveness of monetary policy, (2) assessed the effect of public debt on financial development, and (3) determined the responsiveness of commercial banks to the monetary policy rate. The study utilizes Structural Vector Autoregression (SVAR), Autoregressive Distributed Lag (ARDL) and Dominance Analysis to analyse monthly data spanning from 2002 to 2020. A purposive sampling procedure was used to select eight (8) participants for the qualitative dimension of the study. The first objective reveals that the interaction between financial development and monetary policy significantly influence inflation, trade openness, and output gap. The study emphasises the importance of a well-developed financial sector in enhancing the transmission mechanism of monetary policy in order to make monetary policy effective. The second objective revealed total debt exhibits a positive long-run association with financial development. However, in the short run, total debt demonstrates a negative relationship. The disaggregated analysis highlights the significant influence of external debt on financial development, emphasizing the importance of prudent international borrowing practices. The third objective suggests that changes in the monetary policy rate have a lasting impact on lending rates, with commercial banks considering clients’ ability to pay and assessing monetary transactions in their responses. Ministry of Finance and bank of Ghana should prioritize the development of a robust financial sector, adopt prudent borrowing practices.