Abstract
An inflation-targeting regime has been in place in Ghana since 2007, but the inflation rate has remained persistently high. During the 2007–2017 period, inflation exceeded the announced target by four percentage points on average, despite the target never falling below a relatively unambitious 8% per annum. We investigate whether the poor conduct of monetary policy is responsible for this outcome, and find that it is not. Monetary policy reaction functions are similar to those estimated for countries with successful monetary policies, and interest rates respond in the theoretically recommended way to inflation shocks.
Highlights
Since the adoption of formal inflation targets (IT) by New Zealand in 1990, the framework has become popular for the conduct of monetary policy in many countries.1 Evidence from previous studies shows that inflation targeting has generally been successful in reducing the inflation level, in non-advanced economies (De Mendonça and De Guimarães e Souza, 2012; Gonçalves and Salles, 2008; Lin and Ye, 2009; Mishkin and Schmidt-Hebbel, 2007; Samarina et al, 2014; see Walsh, 2009, for a useful survey)
By estimating various alternative specifications of a monetary policy reaction function for Ghana, that the response of interest rates to inflation shocks has been similar in the long run to that in countries that are regarded as having been successful in controlling inflation, even if the short-run reaction might be towards the weak end of the spectrum
The natural question is: if monetary policy reaction functions are similar to those estimated for countries with successful monetary policies, and interest rates respond to inflation shocks in the theoretically recommended manner, what explains the actual failure to reduce the average inflation rate? a formal investigation of this question is beyond the scope of this study, we present one conjecture here
Summary
Since the adoption of formal inflation targets (IT) by New Zealand in 1990, the framework has become popular for the conduct of monetary policy in many countries. Evidence from previous studies shows that inflation targeting has generally been successful in reducing the inflation level, in non-advanced economies (De Mendonça and De Guimarães e Souza, 2012; Gonçalves and Salles, 2008; Lin and Ye, 2009; Mishkin and Schmidt-Hebbel, 2007; Samarina et al, 2014; see Walsh, 2009, for a useful survey). Ghana is one country where initially high inflation has persisted in double figures after the adoption of inflation targeting, and stayed far above relatively unambitious targets.. The inflation target has generally been slightly below 10% p.a., except for a brief period in 2008-09 when the target was relaxed to allow for rapid imported food price inflation, whereas the actual inflation rate since 2007 has averaged over 13% p.a., with no sign of any downward trend, so the gap between actual and target inflation has been persistently substantial. Even though the inflation-targeting regime in Ghana may have been an improvement on previous monetary policy, the fact remains that high inflation has persisted well above the target during the inflation-targeting period. On average inflation has exceeded the target by a substantial margin (4.0 percentage points, since the official adoption of inflation target in May 2007), despite the fact that the target has been relatively unambitious by international standards. In most countries the IT regime has kept inflation much lower than in Ghana
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