College of Humanities & Social Sciences

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Browsing College of Humanities & Social Sciences by Author "Abdul, Razak Alhassan"

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    Estimating the responses of real GDP and inflation to monetary policy instruments shocks: evidence from Ghana
    (2015-02-13) Abdul, Razak Alhassan
    This study examined the responses of real GDP and inflation to monetary policy instruments shocks in Ghana using a multivariate modeling technique of the Vector Autoregression (VAR) and focusing on the reduced-form relationship between real GDP, price level, broad money supply (M2), real lending rate, real effective exchange rate and domestic credit for the period 1980-2012. The stochastic shocks of monetary policy actions and decisions on the real GDP and inflation were carried out by examining the dynamic nature of Granger Causality Test, Cholesky Ordered Impulse Response Functions and Forecast Error Variance Decomposition for the VAR model. The study found that the potency of monetary policy in influencing real GDP and inflation is limited, as important channels of monetary transmission are not fully functional. In particular, the lending rate channel, credit channel, and the exchange rate channel were found weak, even though there is evidence of money supply as the only monetary policy instrument exerting significant effects on real GDP. Surprisingly, the connection between money supply and inflation is less clear in the case of Ghana. There is also evidence of transmission to inflation of changes in the lending rate. This study has, therefore, established the lack of unequivocal evidence in support of the conventional channel of monetary policy transmission mechanism. It has revealed that money supply was the most important variable in predicting real GDP in the case of Ghana during the study period. It is recommended that a more expansionary monetary policy should accompany a set of policies geared towards improving investment efficiency and bolstering consumption. In addition, the Bank of Ghana should entice more reputable foreign banks, especially Islamic banks into the Ghanaian market with a view to importing expertise, increasing competition and efficiency of bank operations and lowering the interest rate spreads among commercial banks.