Estimated DSGE Model for Macroeconomic Analysis in a Small-Open Economy: A Ghanaian Perspective

Abstract

The study develops a standard representative-agents’ New Keynesian model for macroeconomic analysis in a developing African economy. Using Bayesian estimation techniques and Ghanaian dataset, the core objective of the paper is to determine the best suited monetary policy rule for Ghana. After determining the most appropriate monetary policy rule for Ghana, the model is then used to ascertain the dominant macroeconomic shocks to inflation, output and interest rate. The basic finding is that a forward-looking Taylor rule - where authority reacts to one-period-ahead inflation deviation from target alongside current output gap - is the most appropriate monetary policy rule for Ghana. In addition, variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. This suggests that monetary policy still matters for output growth in Ghana in the short-to-long run. The dominant determinants of inflation are exchange rate risk premium and price mark-up shocks. The dominant drivers of domestic interest rate are price mark-up, domestic monetary policy and government spending shocks are across forest horizon. By implication, upholding exchange rate stability alongside fiscal prudence is very critical for achieving the broad macroeconomic objectivities in Ghana.