Inflation targeting monetary policy and economic growth in Ghana

Abstract

This study investigated the relationship of inflation targeting monetary policy and economic growth in Ghana. Inflation rate was measured by conditional variance generated by fitting an empirical Generalized Autoregressive Conditional Hetroskedasticity (GARCH) model to seasonally adjust annual consumer price inflation for the period 1960-2015. The inflation rate measure, together with macroeconomic control variables, was used to estimate economic growth models for two periods corresponding to two monetary policy regimes and a third period covering the full sample. The first period corresponds to the pre-inflation targeting regime covering 1960-2002. During this period, Ghana had adopted various monetary policy frameworks including exchange-rate targeting, discretionary monetary policy, monetary-aggregate targeting and an eclectic approach. This period was largely characterized by high inflation rate. The inflation rate in turn had significant negative impact on economic growth during this period. Nonetheless, inflation rate did not have any statistically significant impact on real economic growth during the inflation targeting monetary policy period, i.e. 2003-2015. The empirical results for the combined growth model were consistent with the findings for the two periods. The implication of this is that by adopting the inflation targeting monetary policy framework since 2003, Ghana has to some extent succeeded in achieving low and stable general price level thereby creating a conducive environment for economic growth. The government may introduce some structural reforms to unlock the economic growth potentials in the country.